Question

In: Accounting

Heels, a shoe manufacturer, is evaluating the costs and benefits of new equipment that would custom...

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:
i =
Year Cash Inflow (Outflow) x PV Factor = Present Value Cumulative Present Value of Inflow (Outflow)
0 $(111,000) x 1.0000 = $(111,000) $(111,000)
1 =
2 =
3 =
4 =
5 =

Solutions

Expert Solution

  • All working forms part of the answer
  • Requirement completed:

Chart Values are Based on:

i =

12%

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

  • Break Even period = 3 years + (5316.40/27962) = 3 + 0.19 = 3.19 years.

This is because, $ 111,000 invested in Year 0 is recovered back in 3 years + remaining $ 5316.40 is recovered during Year 4.


Related Solutions

Heels, a shoe manufacturer, is evaluating the costs and benefits of new equipment that would custom...
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...
YMCMB Inc. is evaluating an equipment that costs $60,000. The expected benefits per year are expected...
YMCMB Inc. is evaluating an equipment that costs $60,000. The expected benefits per year are expected to be $19,500 while costs are expected to be $9,500. This equipment should have a useful life of 10 years and the company’s WACC is 7%. Calculate the firm’s NPV and IRR. Should YMCMB buy this equipment? (Hint: find the cash flows first, then calculate the firm’s NPV).
Mastery Problem: Evaluating Variances from Standard Costs Sole Purpose Shoe Company Sole Purpose Shoe Company is...
Mastery Problem: Evaluating Variances from Standard Costs Sole Purpose Shoe Company Sole Purpose Shoe Company is owned and operated by Sarah Charles. The company manufactures casual shoes, with manufacturing facilities in your state. Sarah began the business this year, and while she has a great deal of experience in manufacturing popular and comfortable shoes, she needs some help in evaluating her results for the year, and asks for your help. Starting Questions Sarah’s first questions for you have to do...
Mastery Problem: Evaluating Variances from Standard Costs Sole Purpose Shoe Company Sole Purpose Shoe Company is...
Mastery Problem: Evaluating Variances from Standard Costs Sole Purpose Shoe Company Sole Purpose Shoe Company is owned and operated by Sarah Charles. The company manufactures casual shoes, with manufacturing facilities in your state. Sarah began the business this year, and while she has a great deal of experience in manufacturing popular and comfortable shoes, she needs some help in evaluating her results for the year, and asks for your help. Starting Questions Sarah’s first questions for you have to do...
Mastery Problem: Evaluating Variances from Standard Costs Sole Purpose Shoe Company Sole Purpose Shoe Company is...
Mastery Problem: Evaluating Variances from Standard Costs Sole Purpose Shoe Company Sole Purpose Shoe Company is owned and operated by Sarah Charles. The company manufactures casual shoes, with manufacturing facilities in your state. Sarah began the business this year, and while she has a great deal of experience in manufacturing popular and comfortable shoes, she needs some help in evaluating her results for the year, and asks for your help. Direct Materials Under normal conditions, Sarah spends $8.40 per unit...
Montreal Ltd. is a manufacturer of custom equipment and applies overhead to jobs on the basis...
Montreal Ltd. is a manufacturer of custom equipment and applies overhead to jobs on the basis of direct Required: labour hours. Montreal Ltd. estimated $840,000 overhead costs and 10,000 direct labour hours for the year. c. Calculate the work in process inventory on January 31, 2015: Montreal Ltd. had 2 jobs in work in process inventory on January 1, 2015. The company started 2 more jobs during January. The following data was provided for January: d. Calculate the finished goods...
Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $116,000, has a...
Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $116,000, has a 6-year life, and costs $9,300 per year to operate. The relevant discount rate is 10 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $8,700 at the end of the project’s life. The relevant tax rate is 21 percent. All cash flows occur at the end...
Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $104,000, has a...
Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $104,000, has a 5 year life, and costs $9,600 per year to operate. The relevant discount rate is 13 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $23,000 at the end of the project’s life. The relevant tax rate is 34 percent. All cash flows occur at the...
Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $146,000, has a...
Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $146,000, has a 4-year life, and costs $10,300 per year to operate. The relevant discount rate is 12 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $10,700 at the end of the project’s life. The relevant tax rate is 21 percent. All cash flows occur at the end...
Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $104,000, has a...
Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $104,000, has a 5-year life, and costs $8,900 per year to operate. The relevant discount rate is 10 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $7,900 at the end of the project’s life. The relevant tax rate is 22 percent. All cash flows occur at the end...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT