Hazel Company Has Just Purchased Equipment That Requires Annual Payments

question 38

Multiple Choice

Hazel Company has just purchased equipment that requires annual payments of $40,000 to be paid at the end of each of the next four years.The appropriate discount rate is 15%.What is the present value of the payments?

• A)$114,199
• B)$160,000
• C)$46,975
• D)$150,135

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Definitions:

Law of Diminishing Returns

Law of Diminishing Returns states that in a production process, adding an additional factor of production, while holding all others constant, will at some point yield lower per-unit returns.

Sunk Costs

Costs that have already been incurred and cannot be recovered or refunded, and should not influence current or future decisions.

Variable Costs

Costs that change in proportion to the level of production or service activity.

Fixed Costs

Expenses that remain constant regardless of the amount of production, like lease payments or wages.