Fabian Company Is Considering the Purchase of a Machine That

question 167

Multiple Choice

Fabian Company is considering the purchase of a machine that will save the company $2,000 per year in operating costs for a period of seven years. The most it should pay for the machine is equal to

• A) $2,000 times the present value of an ordinary annuity for 7 periods.
• B) $14,000.
• C) $2,000 divided by the future value of a single sum at the end of 7 periods.
• D) $2,000 times the future value of an ordinary annuity for 7 periods.

---

Definitions:

Amortized

Refers to the process of gradually writing off the initial cost of an asset over a period.

Capitalized

Expenses or costs that are recorded as an asset on a balance sheet rather than an expense, to be amortized or depreciated over time.

Financial Lease

A financial lease is a lease agreement where the lessee assumes both the ownership risks and rewards of the leased asset, typically for its useful life.

Operating Lease

A lease agreement allowing the use of an asset without ownership, typically with lower monthly payments and shorter terms than a capital lease.