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

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Heels, a shoe manufacturer, is evaluating the costs and benefitsof new equipment that would custom fit each pair of athletic shoes.The customer would have his or her foot scanned by digital computerequipment; this information would be used to cut the raw materialsto provide the customer a perfect fit. The new equipment costs$111,000 and is expected to generate an additional $44,000 in cashflows for 5 years. A bank will make a $111,000 loan to the companyat a 12% interest rate for this equipment’s purchase. Use thefollowing table to determine the break-even time for thisequipment. All cash flows occur at year-end. (PV of $1, FV of $1,PVA of $1, and FVA of $1) (Use appropriate factor(s) fromthe 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 =

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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.

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Transcribed Image Text

Heels, a shoe manufacturer, is evaluating the costs and benefitsof new equipment that would custom fit each pair of athletic shoes.The customer would have his or her foot scanned by digital computerequipment; this information would be used to cut the raw materialsto provide the customer a perfect fit. The new equipment costs$111,000 and is expected to generate an additional $44,000 in cashflows for 5 years. A bank will make a $111,000 loan to the companyat a 12% interest rate for this equipment’s purchase. Use thefollowing table to determine the break-even time for thisequipment. All cash flows occur at year-end. (PV of $1, FV of $1,PVA of $1, and FVA of $1) (Use appropriate factor(s) fromthe tables provided.)Chart Values are Based on:i =YearCash Inflow (Outflow)xPV Factor=Present ValueCumulative Present Value of Inflow (Outflow)0$(111,000)x1.0000=$(111,000)$(111,000)1=2=3=4=5=