Chee Company has gathered the
following data on a proposed investment project:
|
|
Investment required in equipment.............
|
$240,000
|
|
|
Annual cash inflows..................................
|
$50,000
|
|
|
Salvage value.............................................
|
$0
|
|
|
Life of the investment...............................
|
8
years
|
|
|
Required rate of return..............................
|
10%
|
82. The
payback period for the investment is closest to:
A) 0.2
years
B) 2.5
years
C) 4.8
years
D) 5.0
years
Ans: C AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Payback period = Investment required
÷ Annual cash inflows
= $240,000 ÷ $50,000
= 4.8 years
83. The
simple rate of return on the investment is closest to:
A) 12.5%
B) 10.0%
C) 20.8%
D) 8.3%
Ans: D AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Medium
Solution:
The simple rate of return is
computed as follows:
|
|
Cost of machine, net of salvage value (a).
|
$240,000
|
|
|
Useful life (b)............................................
|
8
years
|
|
|
Annual depreciation (a) ÷ (b)....................
|
$30,000
|
|
|
Annual cash inflows..................................
|
$50,000
|
|
|
Less annual depreciation...........................
|
30,000
|
|
|
Annual incremental net operating income
|
$20,000
|
Simple rate of return = Annual
incremental net operating income ÷ Initial investment = $20,000 ÷ $240,000 =
8.3%
84. The
net present value on this investment is closest to:
A) $160,000
B) $240,024
C) $58,800
D) $26,750
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Solution:
|
|
Year(s)
|
Amount
|
10%
Factor
|
PV
|
|
Annual cash inflows....
|
1-8
|
$50,000
|
5.335
|
$266,750
|
|
Initial investment.........
|
Now
|
($240,000)
|
1.000
|
( 240,000)
|
|
Net present value.........
|
|
|
|
$ 26,750
|
85. The
internal rate of return on the investment is closest to:
A) 11%
B) 13%
C) 15%
D) 17%
Ans: B AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Factor of the internal rate of
return
= Investment required ÷ Net annual
cash inflow = $240,000 ÷ $50,000 = 4.800
The factor of 4.800 for 8 years
represents an internal rate of return of close to 13%.
Use the following to answer
questions 86-87:
(Ignore income taxes in this
problem.) The Rapp Company is considering buying a new machine which will
require an initial outlay of $15,000. The company estimates that over the next
four years this machine would save $6,000 per year in cash operating expenses.
At the end of four years, the machine would have no salvage value. The
company's required rate of return is 14%.
86. The
net present value of this investment is closest to:
A) $(12,632)
B) $17,484
C) $2,484
D) $3,612
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Solution:
|
|
Year(s)
|
Amount
|
14%
Factor
|
PV
|
|
Annual cost savings.....
|
1-4
|
$6,000
|
2.914
|
$17,484
|
|
Initial investment.........
|
Now
|
($15,000)
|
1.000
|
( 15,000)
|
|
Net present value.........
|
|
|
|
$ 2,484
|
87. The
machine's internal rate of return is closest to:
A) 16%
B) 18%
C) 20%
D) 22%
Ans: D AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Factor of the internal rate of
return = Investment required ÷ Net annual cash inflow = $15,000 ÷ $6,000 =
2.500
The factor of 2.500 for 4 years
represents an internal rate of return of almost 22%.
Use the following to answer
questions 88-89:
(Ignore income taxes in this problem.)
Allo Foundation, a tax-exempt organization, invested $200,000 in cost-saving
equipment. The equipment has a five-year useful life with no salvage value.
Allo estimates that the annual cash savings from this project will amount to
$65,000. On investments of this type, Allo's required rate of return is 12%.
88. The
net present value of the project is closest to:
A) $34,300
B) $36,400
C) $90,000
D) $125,000
Ans: A AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium Source: CPA, adapted
Solution:
|
|
Year(s)
|
Amount
|
12%
Factor
|
PV
|
|
Annual cost savings.....
|
1-5
|
$65,000
|
3.605
|
$234,325
|
|
Initial investment.........
|
Now
|
($200,000)
|
1.000
|
( 200,000)
|
|
Net present value.........
|
|
|
|
$ 34,325
|
89. Allo's
internal rate of return on this project is closest to:
A) 13%
B) 15%
C) 17%
D) 19%
Ans: D AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted
Solution:
Factor of the internal rate of
return = Investment required ÷ Net annual cash inflow = $200,000 ÷ $65,000 =
3.077
The factor of 3.077 for 5 years
represents an internal rate of return of almost 19%.
helpfull
ReplyDelete