The Cost of a New Machine Is $250,000

question 43

Multiple Choice

The cost of a new machine is $250,000.The machine has a five-year life and no salvage value.If the cash flow each year is equal to 25% of the cost of the machine,calculate the payback period for the project:

• A)2.0 years
• B)2.5 years
• C)3.0 years
• D)4.0 years

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Definitions:

Sustainable Growth Rate

The maximum growth rate a company can achieve without having to increase its financial leverage or debt.

Internal Growth Rate

The maximum rate at which a company can expand its operations using only internally generated revenues, without resorting to external financing.

Plowback Ratio

The proportion of earnings retained by a company after dividends are paid, usually to fund growth or pay down debt.

Debt-Equity Ratio

A measure used to evaluate a company's financial leverage, calculated by dividing its total liabilities by its shareholders' equity.