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21.doc-Accounting, 9e, Global Edition (Horngren) Chapter
Page 56
4) Alpha Company is considering an investment of $1,000,000 in a land development project.
It will yield cash
flows of $300,000 for 5 years.
Alpha uses a discount rate of 7%.
If the company analyzes the project using NPV,
this should be considered a good investment opportunity.
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
Answer:
TRUE
Explanation:
Calculations: $1,000,000 - (4.100 × $300,000) = $230,000
Diff: 2
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
5) Centurion Company is considering a mineral extraction project which requires an initial investment of $2,000,000
and will yield annual cash flows of $300,000 for 8 years.
Centurion has an 8% hurdle rate.
If Centurion uses the
NPV method of evaluation investments, this would be considered a good investment opportunity.
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
Answer:
FALSE
Explanation:
Calculations: $2,000,000 - (5.747 × $300,000) = ($275,900)
Diff: 2
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
56
Copyright © 2012 Pearson Education
Page 57
6) Using the NPV method of evaluating investments, a company should consider a project a good investment
opportunity as long as the NPV of the total cash flows is positive.
Answer:
TRUE
Diff: 1
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
7) La Grange Company is evaluating an opportunity to invest $50,000 in new manufacturing equipment.
It will
have a useful life of 3 years, and will generate $10,000 cash flows at the end of Year 1; $20,000 of cash flows at the
end of Year 2; and $30,000 of cash flows at the end of Year 3.
If La Grange uses a discount rate of 10% to calculate
NPV, they will accept the opportunity as a good investment.
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
Answer:
FALSE
Explanation:
Calculations:
$10,000
0.909
9,090
$20,000
0.826
16,520
$30,000
0.751
22,530
0
0
0
(50,000)
(1,860)
Diff: 2
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
57
Copyright © 2012 Pearson Education
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