23) Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that

the equipment will generate cash flows as follows:

Year 1

$100,000

Year 2

$100,000

Year 3

$125,000

Year 4

$125,000

Year 5

$75,000

What is the payback period?

A) 4 years

B) 3.2 years

C) 3.5 years

D) 3 years

Answer:

B

Explanation:

B) Calculations:

$100,000 + $100,000 + $125,000 = $325,000

$350,000 - $325,000 = $25,000

$25,000/$125,000 = 0.2

3 + 0.2 = 3.2

Diff: 2

LO:

21-2

EOC Ref:

E21-16

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

24) Sullivan Company is considering the purchase of a new machine costing $80,000. Sullivan's management is

estimating that the new machine will generate additional cash flows of $12,000 a year for ten years and have a

salvage value of $3,000 at the end of ten years. What is the machine's payback period?

A) 7 years

B) 6.7 years

C) 6 years

D) 5.33 years

Answer:

B

Explanation:

B) Calculations:

$80,000/$12,000 = 6.7

Diff: 2

LO:

21-2

EOC Ref:

E21-16

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

13

Copyright © 2012 Pearson Education

25) Dylan Company is considering an investment in new equipment costing $720,000. The equipment will be

depreciated on a straight-line basis over a five-year life and is expected to have a salvage value of $45,000. The

equipment is expected to generate net cash flows totaling $970,000 during the five years. What is the rate of return

associated with the equipment investment?

A) 15.4%

B) 16.4%

C) 30.4%

D) 13.9%

Answer:

A

Explanation:

A) Calculations:

$970,000 - ($720,000 - $45,000) = $295,000

$295,000/5 = $59,000

$59,000/[($720,000 + $45,000)/2] = 15.4%

Diff: 3

LO:

21-2

EOC Ref:

E21-17

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

26) Clapton Corporation is considering an investment in new equipment costing $900,000. The equipment will be

depreciated on a straight-line basis over a ten-year life and is expected to have a salvage value of $90,000. The

equipment is expected to generate net cash flows of $140,000 for each of the first five years and $100,000 for each

of the last five years.

What is the accounting rate of return associated with the equipment investment?

A) 12.1%

B) 7.9%

C) 17.3%

D) 9.7%

Answer:

B

Explanation:

B) Calculations:

$1,200,000 - $810,000 = $390,000

$390,000/10 = $39,000

($900,000 + $90,000)/2 = $495,000

$39,000/$495,000 = 7.9 %

Diff: 3

LO:

21-2

EOC Ref:

E21-17

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

14

Copyright © 2012 Pearson Education