When debt is used to finance purchase of assets,the term or time span of the debt should be similar to the lifespan of the assets.

Question

Quizplus · Accepted Answer

This is because the assets being financed with the debt should ideally generate enough cash flow over their lifespan to pay off the debt. If the debt has a shorter term than the lifespan of the assets, the borrower may have difficulty repaying the debt and may need to refinance or sell the assets before they have fully depreciated or reached the end of their useful lives. On the other hand, if the debt has a longer term than the lifespan of the assets, the borrower may be paying interest on the debt long after the assets have ceased to generate revenue. Matching the term of the debt to the lifespan of the assets helps ensure that the borrower can meet their financial obligations and maximize the return on their investment.

When Debt Is Used to Finance Purchase of Assets,the Term