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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 13
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
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
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
B
Explanation:
B) Calculations:
\$80,000/\$12,000 = 6.7
Diff: 2
LO:
21-2
EOC Ref:
E21-16
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
13

##### Page 14
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%
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
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%
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
Critical Thinking
AICPA Functional:
Measurement
14

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