15) 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

Required rate of return

14%

10%

How long is the payback period for Proposal X?

A) 4.50 years

B) 4.77 years

C) 8 years

D) 10.33 years

Answer:

B

Explanation:

B) Calculations: $620,000/$130,000 = 4.77 yrs

Diff: 2

LO:

21-2

EOC Ref:

E21-17

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

16) 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

Required rate of return

14%

10%

What is the accounting rate of return for Proposal Y?

A) 15.0%

B) 16.0%

C) 20.0%

D) 40.0%

Answer:

A

Explanation:

A) Calculations:

($80,000 × 8) - $400,000 = $240,000

($240,000/8)/($400,000/2) = 15%

Diff: 3

LO:

21-2

EOC Ref:

E21-17

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

9

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17) ABC Company is adding a new product line that will require an investment of $1,500,000. The product line is

estimated to generate cash inflows of $300,000 the first year, $250,000 the second year, and $200,000 each year

thereafter for ten more years. What is the payback period?

A) 2.73 years

B) 6.00 years

C) 6.75 years

D) 7.25 years

Answer:

C

Explanation:

C) Calculations:

$1,500,000 - $300,000 - $250,000 = $950,000

$950,000/$200,000 = 4.75

4.75 + 2 = 6.75

Diff: 2

LO:

21-2

EOC Ref:

E21-16

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

18) Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-

line method of depreciation. The following information is available:

Investment A

Investment B

Initial capital investment

$60,000

$90,000

Estimated useful life

3 years

3 years

Estimated residual value

— 0 —

— 0 —

Estimated annual net cash inflow for 3 years

$25,000

$40,000

Required rate of return

10%

12%

How long is the payback period for Investment A?

A) 0.4 years

B) 2.4 years

C) 2.5 years

D) 3.0 years

Answer:

B

Explanation:

B) Calculations: $60,000/$25,000 = 2.4

Diff: 2

LO:

21-2

EOC Ref:

E21-16

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

10

Copyright © 2012 Pearson Education