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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 43
27) Amanda is ready to retire and as a retirement benefit, she can choose to take $380,000 now or $50,000 at the end
of each year for a period of 10 years.
To compare the two options, she must calculate the present value of both
alternatives.
She believes a discount rate of 5% would be the most appropriate rate to apply.
How much is the
present value if she takes the option of $50,000 a year for 10 years?
Please refer to the following data, if needed:
Present Value of
an Annuity of $1
5%
6%
7%
8%
9%
10%
1
0.952
0.943
0.935
0.926
0.917
0.909
2
1.859
1.833
1.808
1.783
1.759
1.736
3
2.723
2.673
2.624
2.577
2.531
2.487
4
3.546
3.465
3.387
3.312
3.240
3.170
5
4.329
4.212
4.100
3.993
3.890
3.791
6
5.076
4.917
4.767
4.623
4.486
4.355
7
5.786
5.582
5.389
5.206
5.033
4.868
8
6.463
6.210
5.971
5.747
5.535
5.335
9
7.108
6.802
6.515
6.247
5.995
5.759
10
7.722
7.360
7.024
6.710
6.418
6.145
A) $380,000
B) $386,100
C) $321,000
D) $399,000
Answer:
B
Explanation:
B) Calculations:
7.722 × $50,000 = $386,100
Diff: 2
LO:
21-3
EOC Ref:
S21-7
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
43
Copyright © 2012 Pearson Education
Page 44
28) Simms Manufacturing is considering two alternative investment proposals with the following data:
Proposal X
Proposal Y
Investment
$620,000
$400,000
Useful life
8 years
8 years
Estimated annual net cash inflows for
8 years
$130,000
$80,000
Residual value
$60,000
$0
Depreciation method
Straight-line
Straight-line
Discount rate
14%
10%
What is the total present value of future cash inflows from Proposal Y?
Present Value of
an Annuity of $1
5%
6%
7%
8%
9%
10%
1
0.952
0.943
0.935
0.926
0.917
0.909
2
1.859
1.833
1.808
1.783
1.759
1.736
3
2.723
2.673
2.624
2.577
2.531
2.487
4
3.546
3.465
3.387
3.312
3.240
3.170
5
4.329
4.212
4.100
3.993
3.890
3.791
6
5.076
4.917
4.767
4.623
4.486
4.355
7
5.786
5.582
5.389
5.206
5.033
4.868
8
6.463
6.210
5.971
5.747
5.535
5.335
9
7.108
6.802
6.515
6.247
5.995
5.759
10
7.722
7.360
7.024
6.710
6.418
6.145
A) $266,750
B) $426,800
C) $436,800
D) $536,800
Answer:
B
Explanation:
B) Calculations: $80,000 × 5.335 = $426,800
Diff: 2
LO:
21-3
EOC Ref:
S21-7
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
44
Copyright © 2012 Pearson Education
Page 45
29) Simms Manufacturing is considering two alternative investment proposals with the following data:
Proposal X
Proposal Y
Investment
$620,000
$400,000
Useful life
8 years
8 years
Estimated annual net cash inflows for 8
years
$130,000
$80,000
Residual value
$0
$0
Depreciation method
Straight-line
Straight-line
Discount rate
9%
10%
What is the total present value of future cash inflows from Proposal X?
Present Value of
an Annuity of $1
5%
6%
7%
8%
9%
10%
1
0.952
0.943
0.935
0.926
0.917
0.909
2
1.859
1.833
1.808
1.783
1.759
1.736
3
2.723
2.673
2.624
2.577
2.531
2.487
4
3.546
3.465
3.387
3.312
3.240
3.170
5
4.329
4.212
4.100
3.993
3.890
3.791
6
5.076
4.917
4.767
4.623
4.486
4.355
7
5.786
5.582
5.389
5.206
5.033
4.868
8
6.463
6.210
5.971
5.747
5.535
5.335
9
7.108
6.802
6.515
6.247
5.995
5.759
10
7.722
7.360
7.024
6.710
6.418
6.145
A) $878,340
B) $703,070
C) $614,230
D) $719,550
Answer:
D
Explanation:
D) Calculations: = 5.535 × $130,000 = $719,550
Diff: 2
LO:
21-3
EOC Ref:
S21-7
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
45
Copyright © 2012 Pearson Education
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