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 $109,000 and is expected to generate an additional $42,000 in cash flows for 5 years. A bank will make a $109,000 loan to the company at a 12% 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, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

	Chart Values are Based on: i = Year Cash Inflow (Outflow) x PV Factor = Present Value Cumulative Present Value of Inflow (Outflow) 0 $(109,000) x 1.0000 = $(109,000) $(109,000) 1 = 2 = 3 = 4 = 5 =

Answer 1

Year	Cash Inflow/ ( Outflow)	*	PV Factor	=	Present Value	Cumulative Present Value of Inflow/(Outflow)
0	$                      (109,000.00)	*	1		$    (109,000.00)	$                                                                       (109,000.00)
1	$                          42,000.00	*	0.893		$         37,506.00	$                                                                         (71,494.00)
2	$                          42,000.00	*	0.797		$         33,474.00	$                                                                         (38,020.00)
3	$                          42,000.00	*	0.712		$         29,904.00	$                                                                           (8,116.00)
4	$                          42,000.00	*	0.635		$         26,670.00	$                                                                           18,554.00
5	$                          42,000.00	*	0.567		$         23,814.00	$                                                                           42,368.00
	Break Even Time	=	3 year + 8116/ 26670
		=	3 year + 0.304 years
		=	3.304 years
	Break Even Time means the time when our initial cash outflow will get recovered taking into consideration the discount rate i.e. called discounted payaback period.