Caliber Company Is Considering the Purchase of a New Machine

question 40

Multiple Choice

Caliber Company is considering the purchase of a new machine costing $800,000. The company's management is estimating that the new machine will generate additional cash flows of $180,000 a year for ten years and have a salvage value of $50,000 at the end of ten years. What is the machine's payback period?

• A)4.44 years
• B)6.77 years
• C)3.33 years
• D)5.33 years

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Definitions:

Term Structure

The relationship between interest rates or bond yields and different terms or maturities.

Duration

Duration is a measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates, typically expressed in years.

Interest Rate Risk

The potential for investment values to change due to variations in the prevailing interest rates.

Coupon Rate

The annual interest rate paid by a bond's issuer to its bondholders, typically expressed as a percentage of the bond's face value.