Mark Is Considering Spending $25,000 on a Farm Tractor That

question 61

Multiple Choice

Mark is considering spending $25,000 on a farm tractor that will increase his crop yield and bring additional revenues of $4,000 for each of the next 7 years. Mark should:

• A) buy the tractor because its benefits of $28,000 outweigh its costs of $25,000.
• B) buy the tractor because inflation will reduce the value of future cash flows.
• C) use present discounted value analysis to decide whether the tractor is a good investment.
• D) not buy the tractor because the payback period extends beyond three years.

---

Definitions:

Systematic Risk

The potential for loss inherent in the entire market or an entire market segment, also known as market risk or non-diversifiable risk.

Beta

A measure of a stock's volatility in relation to the overall market, indicating its risk level compared to the market average.

Capital Asset Pricing Model

An approach outlining the connection between inherent risks and the expected return of assets, with a focus on stocks.

SML

The Security Market Line, a graphical representation used in the capital asset pricing model (CAPM) to show the relationship between the risk of an investment and its expected return.