Chee Company has gathered the following data on a proposed investment project:

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%.