19) 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...

19) 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:

How long is the payback period for Investment B?

A) 0.44 years

B) 2.25 years

C) 2.35 years

D) 3.00 years

Answer:  B

Explanation:  B) Calculations:  $90,000/$40,000 = 2.25

Diff: 2

LO:  21-2

EOC Ref:  E21-16

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

20) Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:

What is the rate of return on the investment?

A) 16.8%

B) 23.9%

C) 18.9%

D) 12.4%

21) Landmark Company is considering an investment in new equipment costing $360,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $70,000 the first year, $80,000 the second year, and $120,000 every year thereafter until the fifth year. What is the payback period for this investment? The residual value is zero.

A) 3.25 years

B) 3.50 years

C) 3.75 years

D) 4 years

22) Pearl Manufacturing is considering an investment in equipment costing $660,000. The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $120,000. The investment is expected to generate annual net cash inflows of $135,000 for 8 years. Using the rate of return model, what is the minimum average annual operating income that must be generated from this investment in order to achieve a 14% rate of return?

A) $18,900

B) $37,800

C) $54,600

D) $92,400

Answer:  C

Explanation:  C) Calculations: 14% × [($660,000+$120,000)/2] = $54,600

Diff: 3

LO:  21-2

EOC Ref:  E21-17

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

23) Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash flows as follows:

What is the payback period?

A) 4 years

B) 3.2 years

C) 3.5 years

D) 3 years

24) Sullivan Company is considering the purchase of a new machine costing $80,000. Sullivan's management is estimating that the new machine will generate additional cash flows of $12,000 a year for ten years and have a salvage value of $3,000 at the end of ten years. What is the machine's payback period?

A) 7 years

B) 6.7 years

C) 6 years

D) 5.33 years

Answer:  B

Explanation:  B) Calculations:  $80,000/$12,000 = 6.7

Diff: 2

LO:  21-2

EOC Ref:  E21-16

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

25) Dylan Company is considering an investment in new equipment costing $720,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to have a salvage value of $45,000. The equipment is expected to generate net cash flows totaling $970,000 during the five years. What is the rate of return associated with the equipment investment?

A) 15.4%

B) 16.4%

C) 30.4%

D) 13.9%

26) Clapton Corporation is considering an investment in new equipment costing $900,000. The equipment will be depreciated on a straight-line basis over a ten-year life and is expected to have a salvage value of $90,000. The equipment is expected to generate net cash flows of $140,000 for each of the first five years and $100,000 for each of the last five years.  What is the accounting rate of return associated with the equipment investment?

A) 12.1%

B) 7.9%

C) 17.3%

D) 9.7%

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:

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