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

question 106

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 seven 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.

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Definitions:

Depreciation

Depreciation is the accounting process of allocating the cost of tangible assets over their useful lives, representing how assets lose value over time.

Carrying Value

The book value of assets and liabilities recorded in the financial statements, often differing from the market value.

Net Realizable Value

The estimated selling price in the ordinary course of business minus the costs of completion, disposal, and transportation.

Accounts Receivable

The sum of money a company is entitled to receive from its customers for goods or services already delivered or used but not yet paid for.