Assume a Firm Has an Ongoing Need for a Machine,and

question 57

Multiple Choice

Assume a firm has an ongoing need for a machine,and the current machine is operating efficiently.The firm should plan to replace this machine when it

• A)reaches the end of its depreciable life.
• B)is fully paid for.
• C)reaches a point where the book value is less than half of the original cost.
• D)can be replaced with a machine that has a lower equivalent annual cost.
• E)can be sold at a price that exceeds the current book value.

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Definitions:

Cost of Retained Earnings

The opportunity cost to shareholders for having a company retain earnings instead of paying them out as dividends.

Flotation Costs

Expenses incurred by a company in issuing new securities, including legal, administrative, and underwriting fees.

Constant Rate

A fixed percentage or value that does not change over a specified period of time, often used in financial formulas to calculate growth or decay.

Retained Earnings

The portion of net income not distributed to shareholders but instead reinvested in the business or used to pay off debt.