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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 54
41) Julio has just received a legal judgment in a civil court case which awards him a settlement of \$24,000 to
be
He would like to sell the rights to the settlement money to a financial institution, so
that he can have the cash now.
In order to estimate the present value of the settlement, he will use a discount rate of
6%.
What is the present value of the settlement?
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) \$20,160
B) \$21,360
C) \$22,360
D) \$22,590
B
Explanation:
B) Calculations:
0.890 × \$24,000 = \$21,360
Diff: 2
LO:
21-3
EOC Ref:
S21-7
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
Learning Objective 21-4
1) Net present value is defined as the difference between the present value of the project's cash inflows and the
investment's cost.
TRUE
Diff: 1
LO:
21-4
EOC Ref:
Accounting Vocabulary
AACSB:
Content/Knowledge
Critical Thinking
AICPA Functional:
Measurement
54

##### Page 55
2) If a company uses a higher discount rate to calculate NPV of an investment, it reflects a higher level of perceived
risk for the investment.
FALSE
Diff: 1
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
3) Dakka Company is considering an investment of \$500,000 in a financial instrument that is expected to return cash
flows of \$80,000 a year for 10 years.
The operations manager says that it is a "no-brainer" because the total cash
flows are \$800,000, and it has a payback of just over six years.
The VP Finance expresses caution.
He says that
because Dakka uses a 10% hurdle rate, a more thorough analysis may show that the investment does not qualify
under the company's investment criteria.
Considering the information provided, the company should reject the
investment.
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
TRUE
Explanation:
Calculations: \$500,000 - (6.145 × \$80,000) = (\$8,400)
Diff: 2
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
55

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