-Gaynor Company Is Considering Purchasing Equipment

question 16

Multiple Choice

-Gaynor Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1, $25,000; Year 2, $45,000; Year 3, $60,000. Below is some of the time value of money information that Gaynor has compiled that might help them in their planning and compounded interest decisions. Gaynor requires a minimum rate of return of 11%. To the closest dollar, what is the maximum price Gaynor should pay for the equipment?

• A) $117,117
• B) $102,917
• C) $165,253
• D) $246,209

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Definitions:

Depletion

A method used to allocate the cost of extracting natural resources, such as timber, minerals, and oil, from the earth over the period those resources are consumed.

Reclamation

The process of restoring land that has been mined, logged, or used for industrial purposes back to its natural state or ensuring it is usable for a different purpose.

Accumulated Depreciation

The cumulative value of depreciation expense assigned to a physical asset from the time it was first utilized.

Major Class of Asset

Represents categories of assets grouped based on their similar financial characteristics, such as cash, inventory, property, etc.