In: Accounting
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
$111,000 and is expected to generate an additional $44,000 in cash
flows for 5 years. A bank will make a $111,000 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: |
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i = |
12% |
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Year |
Cash Inflow (Outflow) |
x |
PV Factor [from PV $1 for 12% table] |
= |
Present Value |
Cumulative Present Value of Inflow (Outflow) |
0 |
$ (111,000.00) |
x |
1 |
= |
$ (111,000.00) |
$ (111,000.00) |
1 |
$ 44,000.00 |
x |
0.8929 |
= |
$ 39,287.60 |
$ (71,712.40) |
2 |
$ 44,000.00 |
x |
0.7972 |
= |
$ 35,076.80 |
$ (36,635.60) |
3 |
$ 44,000.00 |
x |
0.7118 |
= |
$ 31,319.20 |
$ (5,316.40) |
4 |
$ 44,000.00 |
x |
0.6355 |
= |
$ 27,962.00 |
$ 22,645.60 |
5 |
$ 44,000.00 |
x |
0.5674 |
= |
$ 24,965.60 |
$ 47,611.20 |
This is because, $ 111,000 invested in Year 0 is recovered back in 3 years + remaining $ 5316.40 is recovered during Year 4.