21.doc-Accounting, 9e, Global Edition (H...
21.doc-Accounting, 9e, Global Edition (Horngren) Chapter
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21.doc-Accounting, 9e, Global Edition (Horngren) Chapter
##### Page 9
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
B
Explanation:
B) Calculations: \$620,000/\$130,000 = 4.77 yrs
Diff: 2
LO:
21-2
EOC Ref:
E21-17
AACSB:
Analytic Skills
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%
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
Critical Thinking
AICPA Functional:
Measurement
9

##### Page 10
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
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
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
B
Explanation:
B) Calculations: \$60,000/\$25,000 = 2.4
Diff: 2
LO:
21-2
EOC Ref:
E21-16
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
10

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