Question

Heels, a shoe manufacturer, is evaluating the costs and benefits of new equipment that would custom fit each pair of athletic shoes. The customer would have his or her foot scanned by digital computer equipment; this Information would be used to cut the raw materials to provide the customer a perfect fit. The new equipment costs $91,000 and is expected to generate an additional $36,000 in cash flows for 5 years. A bank will make a $91,000 loan to the company at a 10% Interest rate for this equipment's purchase. Use the following table to determine the break-even time for this equipment. All cash flows occur at year-end. (PV of $1. EV of $1, PVA of $1, and EVA of $1) (Use appropriate factor(s) from the tables provided.) Chart Values are Based on: 10% Cumulative Cash Inflow Present Value of Inflow Year Present Value PV Factor (Outflow) (Outflow) (91,000) x 1.0000- (91,000) $ (91,000) 36,000 x 36,000 x 2.5 years

Answer 1

Chart values are based on:
i=10%	(Discount factor based on 10% present value table)
Year	Cash inflow (outflow)	*	PV factor	=	Present value	Cumulative present value of inflow (outflow)
0	-91000		1		-91000	-91000
1	36000		0.90909		32727	-58273
2	36000		0.82645		29752	-28521
3	36000		0.75131		27047	-1473
4	36000		0.68301		24588	23115
5	36000		0.62092		22353	45468
Break-even time=A+(B/C)
A=Last year with a negative cumulative cash flow=3
B=Absolute value of cumulative cash flow at the end of period A=$ 1473
C=Present value of cash inflow for the period following A=$ 24588
Break-even time=3+(1473/24588)=3+0.0599=3.06 years