27) Wasson Corporation is considering an investment project costing $520,000. The project is estimated to have an

eight-year life, generate annual cash flows of $120,000, and have a salvage value of $40,000 after eight years. What

is the project's payback period?

A) 2.8 years

B) 4.3 years

C) 4 years

D) 6.5 years

Answer:

B

Explanation:

B) Calculations: $520,000/$120,000 = 4.3

Diff: 2

LO:

21-2

EOC Ref:

E21-16

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

28) A company is evaluating 3 possible investments.

Each uses straight-line depreciation.

See data below:

Project A

Project B

Project C

Investment

$400,000

$20,000

$100,000

Salvage value

$0

$2,000

$5,000

Net cash flows:

Year 1

$100,000

$10,000

$40,000

Year 2

$100,000

$8,000

$25,000

Year 3

$100,000

$5,000

$30,000

Year 4

$100,000

$3,000

$10,000

Year 5

$100,000

$0

$0

What is the payback period for Project A?

A) 3.5 years

B) 4.5 years

C) 4.0 years

D) 5.0 years

Answer:

C

Explanation:

C) Calculations: $400,000/$100,000 = 4

Diff: 1

LO:

21-2

EOC Ref:

E21-16

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

15

Copyright © 2012 Pearson Education

29) A company is evaluating 3 possible investments.

Each uses straight-line depreciation.

See data below:

Project A

Project B

Project C

Investment

$400,000

$20,000

$100,000

Salvage value

$0

$2,000

$5,000

Net cash flows:

Year 1

$100,000

$10,000

$40,000

Year 2

$100,000

$8,000

$25,000

Year 3

$100,000

$5,000

$30,000

Year 4

$100,000

$3,000

$10,000

Year 5

$100,000

$0

$0

What is the payback period for Project B?

A) 3.5 years

B) 2.5 years

C) 2.4 years

D) 3.0 years

Answer:

C

Explanation:

C) Calculations:

$20,000 - $10,000 - $8,000 = $2,000

$2,000/$5,000 = 0.4

2 + 0.4 = 2.4

Diff: 1

LO:

21-2

EOC Ref:

E21-16

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

16

Copyright © 2012 Pearson Education

30) A company is evaluating 3 possible investments.

Each uses straight-line depreciation.

See data below:

Project A

Project B

Project C

Investment

$400,000

$20,000

$100,000

Salvage value

$0

$2,000

$5,000

Net cash flows:

Year 1

$100,000

$10,000

$40,000

Year 2

$100,000

$8,000

$25,000

Year 3

$100,000

$5,000

$30,000

Year 4

$100,000

$3,000

$10,000

Year 5

$100,000

$0

$0

What is the payback period for Project C?

A) 3.5 years

B) 2.5 years

C) 2.4 years

D) 3.0 years

Answer:

A

Explanation:

A) Calculations:

$40,000 + $25,000 + $30,000 = $95,000

$5,000/$10,000 = 0.5

3 + 0.5 = 3.5

Diff: 1

LO:

21-2

EOC Ref:

E21-16

AACSB:

Analytic Skills

AICPA Business:

Critical Thinking

AICPA Functional:

Measurement

17

Copyright © 2012 Pearson Education