QS 24-15 Computation of break-even time LO A1 Heels, a shoe manufacturer, is eva

Question

QS 24-15 Computation of break-even time LO A1 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 $114,000 and is expected to generate an additional $45,000 in cash flows for 5 years. A bank will make a $114,000 loan to the company at a 10% interest rate for this equipments purchase and compute the recovery time for both the payback period and break-even time. (PV of $1, PV of $1, PVA of $1, and FVA of $1). (Use appropriate factor(s) from the tables provided.) Chart Values are Based on: Cumulative h Inflow (Outflow) x PV Factor- Present Value Present Value of Inflow (Outflow) 0 (114,000)x 1.00001= IS (114,000)| S (114.000) 4

Explanation / Answer

I = 10% Year Cash Inflow(Outflow) PV Factor Present Value CumulativePresent Valueof Inflow(Outflow) 0 -114000 1 -114000 -114000 1 45000 0.9091 40910 -73090 2 45000 0.8264 37188 -35902 3 45000 0.7513 33809 -2093 4 45000 0.683 30735 28642 5 45000 0.6209 27941 56583 Break­even time = 3.1 years

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