Bev Is Considering Purchasing a New Button Holer for Her

question 38

Multiple Choice

Bev is considering purchasing a new button holer for her business. She estimates the machine will cost $90,000 and will be paid for in cash. Her cash savings from the first 4 years of operation of the machine will be $20,000 in year 1, $30,000 in year 2, $35,000 in year 3 and $35,000 in year 4. The payback period for the machine is:

• A)4 years.
• B)3.86 years.
• C)3.14 years.
• D)2.66 years.

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Definitions:

Bank Loan Payable

A liability representing the amount of borrowed funds from a bank that the borrower is legally required to repay in the future.

Interest Expense

The cost incurred by an entity for borrowed funds; it is the price paid for the use of borrowed money or money earned from deposited funds.

Interest Payable

Refers to the amount of interest that has been incurred on borrowed funds but has not yet been paid out to the lender as of the reporting date.