A Company Is Considering the Purchase of a New Piece

question 59

Multiple Choice

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1) , $30,000 (year 2) , $18,000 (year 3) , $12,000 (year 4) and $6,000 (year 5) . The payback period is:

• A) 4.50 years.
• B) 4.25 years.
• C) 3.50 years.
• D) 3.00 years.
• E) 2.50 years.

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Definitions:

Bond Liability

The commitment to repay the principal amount of a bond along with interest, as per the terms agreed upon with bondholders.

Straight-Line Method

A method of calculating depreciation and amortization that evenly distributes the cost of an asset over its useful life.

Market Rate

Market Rate is the prevailing interest rate available in the marketplace on loans, savings, or investments.

Coupon Rate

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