Heels, a shoe manufacturer, is evaluating the costs and benefits of new equipmen

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 or this equipment's purchase and compute the recovery time for both the payback period and break-even time. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Complete this question by entering your answers in the tabs below. Break even ayback Period Compute the recovery time for the payback period. Payback Period Choose Numerator I Choose Denominator: Payback Period Payback period 0 Payback Period Break even time >

Explanation / Answer

Calculation of payback period.

Payback period =

Initial Investment/Cash Flow per Period

Payback period =

$ 91000/$ 36000

Payback period =

2.5 Years

Calculation of Breakeven Time

Breakeven time is nothing but a Payback period with discounted cash flows.

Chart value are based on

i=

10%

Year

Cash Inflow (Outflow)

x

Pv Factor

=

Present Value

Cumulative present value of Inflows(Outflows)

0

$    (91,000.00)

1.0000

$   (91,000.00)

1

$      36,000.00

0.9091

$      32,727.27

$   (58,272.73)

2

$      36,000.00

0.8264

$      29,752.07

$   (28,520.66)

3

$      36,000.00

0.7513

$      27,047.33

$      (1,473.33)

4

$      36,000.00

0.6830

$      24,588.48

$      23,115.16

5

$      36,000.00

0.6209

$      22,353.17

$      45,468.32

Total

$      89,000.00

$    136,468.32

Breakeven Time = A +(B/c)

In the above formula,

A is the last period with a negative cumulative cash flow

B is the cumulative cash flow at the end of the period A (absolute value)

C is the total cash flow during the period after A

Breakeven Time = 3+(1473.33/24588.48)

Breakeven Time = 3.1 Years

Payback period =

Initial Investment/Cash Flow per Period

Payback period =

$ 91000/$ 36000

Payback period =

2.5 Years

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