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Multiple Choice
In an equipment capital budgeting decision, recovering the original investment means that the:
A
equipment has been fully depreciated for tax purposes
B
cumulative net cash inflows equal the initial cost of the equipment
C
equipment has reached the end of its useful life
D
book value of the equipment is zero
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Verified step by step guidance
1
Understand the concept of 'recovering the original investment' in capital budgeting. This refers to the point at which the cumulative net cash inflows from the investment equal the initial cost of the equipment.
Recognize that depreciation for tax purposes is a separate concept and does not directly determine when the original investment is recovered. Depreciation affects tax savings but does not equate to cash inflows.
Note that the end of the equipment's useful life or its book value reaching zero does not necessarily mean the original investment has been recovered. These are accounting measures, not cash flow measures.
Focus on cumulative net cash inflows, which are the total cash inflows generated by the equipment over time. These inflows include revenues minus operating expenses and taxes, and they are used to determine when the initial cost is recovered.
To solve similar problems, calculate cumulative net cash inflows for each period and compare the total to the initial cost of the equipment. When the cumulative inflows equal the initial cost, the original investment is considered recovered.