Question

No deduction this year. Even though the contract period is 12 months or fewer, Justin is required to capitalize the cost of the prepayment for the insurance policy because the contract period extends beyond the end of next year. What is the reason for Justin to capitalize the cost of the prepayment for the insurance policy?

1) The contract period is 12 months or fewer.
2) The cost of the prepayment is deductible this year.
3) The contract period extends beyond the end of next year.
4) Justin is required to capitalize the cost of the prepayment.

Answer 1

The payback period is the time taken for an investment's savings to cover its costs. To calculate it for installing insulation, the cost of energy and insulation are needed along with the amount of energy saved. The shorter the payback period, the more favorable the investment.

Step-by-step explanation:

When businesses make investments in new equipment or upgrades, such as installing extra insulation, it is important to understand the payback period. The payback period is the duration it takes for the savings from an investment to cover its initial cost. To calculate the payback time for extra insulation, given the energy cost of $1.00 per million joules and the insulation cost of $4.00 per square meter, we need additional information such as the amount of energy saved by the insulation and the square meters of insulation installed.

Although the exact calculation for the payback time cannot be performed without this missing information, the concept remains that the payback period is a crucial metric for determining the viability and efficiency of investments for businesses or individuals. In general, if the payback period is shorter, the investment is often considered more favorable because it means the capital cost is recovered quicker, leading to potential profits or savings.