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21.doc-Accounting, 9e, Global Edition (Horngren) Chapter
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21.doc-Accounting, 9e, Global Edition (Horngren) Chapter
Page 71
35) Harvard Investments is considering an opportunity which will require an initial outlay of \$100,000 but will
return cash flows for the next 5 years as follows:
\$10,000 in Year 1, \$20,000 in Year 2, \$30,000 in Year 3, \$40,000
in Year 4, and \$50,000 in Year 5.
If Harvard uses a discount rate of 9%, how much is the NPV of the project?
Present Value of
\$1
5%
6%
7%
8%
9%
10%
1
0.952
0.943
0.935
0.926
0.917
0.909
2
0.907
0.890
0.873
0.857
0.842
0.826
3
0.864
0.840
0.816
0.794
0.772
0.751
4
0.823
0.792
0.763
0.735
0.708
0.683
5
0.784
0.747
0.713
0.681
0.650
0.621
6
0.746
0.705
0.666
0.630
0.596
0.564
7
0.711
0.665
0.623
0.583
0.547
0.513
8
0.677
0.627
0.582
0.540
0.502
0.467
9
0.645
0.592
0.544
0.500
0.460
0.424
10
0.614
0.558
0.508
0.463
0.422
0.386
A) \$2,400 positive
B) \$1,090 negative
C) \$9,990 positive
D) \$5,867 positive
C
Explanation:
C) Calculations:
\$10,000
0.917
9,170
\$20,000
0.842
16,840
\$30,000
0.772
23,160
\$40,000
0.708
28,320
\$50,000
0.650
32,500
(100,000)
9,990
Diff: 2
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
36) When comparing several investments with the same initial outlay, the decision should be made on the basis of
which of the following?
A) Which project has the most total cash flows
B) Which project has the shortest payback
C) Which project has the highest NPV
D) Which project is completed first
C
Diff: 1
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
71

Page 72
37) Under conditions of limited resources, when a company is comparing several investments with the different
amounts for their initial outlay, the decision should be made on the basis of which of the following?
A) Which project has the most total cash flows
B) Which project has the shortest payback
C) Which project has the highest profitability index
D) Which project is completed first
C
Diff: 1
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
38) Which of the following best describes the
profitability index
?
A) An index of projects in order of which has the most net income
B) The ratio of present value of cash flows to initial investment
C) The ratio of total cash flows to initial investment
D) An array of possible investment outcomes at different discount rates
B
Diff: 1
LO:
21-4
EOC Ref:
Accounting Vocabulary
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
39) Which of the following best describes
capital rationing
?
A) When a company's limited resources prevents them from taking on all good investment opportunities
B) The budgeting of investment funds among the divisions of a company
C) Putting limits on amounts of funds available to pay dividends
D) When a company's limited resources forces them to reduce operating expenses
A
Diff: 1
LO:
21-4
EOC Ref:
Accounting Vocabulary
AACSB:
Content/Knowledge
Critical Thinking
AICPA Functional:
Measurement
72

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