A Manager Is Considering Investing in a New Piece of Equipment

Multiple Choice

A manager is considering investing in a new piece of equipment. The equipment cost $50,000 and the manager will finance the full amount of the cost over three years at an interest rate of 4 percent. In the third year, the manager will repay the entire principal of the loan plus the year's annual interest, after making interest- only payments for the first two years. The equipment will generate $30,000 in future operating profit each of the three years and has a salvage value of zero at the end of the three years. The tax rate on the firm's profit is 8 percent each year. What is the firm's interest- only payment in each of the three years?

A) $2,400
B) $4,000
C) $1,200
D) $2,000