Lance is trying to decide whether to purchase a new bulldozer to expand his business. He is confident he has enough work to keep the bulldozer busy and that repaying the loan will not be a problem. What advice would you give Lance?
A) If the interest rate on the loan is less than the return on this asset, buy.
B) If the return on this asset is more than the return on his equity, don't buy.
C) If his current return on equity is greater than the return on this asset, buy.
D) If his total asset turnover rate is greater than one, don't buy.

Question

Quizplus · Accepted Answer

Lance should compare the interest rate on the loan with the return on the new bulldozer. If the return on the asset is greater than the interest rate on the loan, it makes financial sense to purchase the bulldozer. This way, Lance can earn a profit on the investment and repay the loan without difficulty. Option A is the only choice that addresses this important consideration.

Lance Is Trying to Decide Whether to Purchase a New