The Net Initial Investment for a Piece of Construction Equipment

question 1

Multiple Choice

The net initial investment for a piece of construction equipment is $3,000,000.Annual cash inflows are expected to increase by $500,000 per year.The equipment has an 8-year useful life.What is the payback period?

• A) 8 years
• B) 6.5 years
• C) 6 years
• D) 5 years

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Definitions:

Annual Percentage Rate

The yearly interest rate charged on borrowed money, including fees and other costs associated with the loan.

Effective Annual Rate

Effective annual rate (EAR) is the actual return on an investment or real cost of a loan, considering compounding interest, expressed as an annual rate.

EAR

Effective Annual Rate, a measure of interest that accounts for compounding over a year, providing a more accurate depiction of financial product returns.

APR

Annual Percentage Rate; a comprehensive measure of the cost of borrowing on an annual basis, including interest and other fees.