A company wishes to buy new equipment for $85,000.The equipment is expected to generate an additional $35,000 in cash inflows for four years.All cash flows occur at year-end.A bank will make an $85,000 loan to the company at a 10% interest rate so that the company can purchase the equipment.Use the table below to determine break-even time for this equipment.
$$\begin{array} { c c }
\text { Year } & \text { Present Value } \
& \text { of 1 at } 10 \% \
0 & 1.0000 \
1 & 0.9091 \
2 & 0.8264 \
3 & 0.7513 \
4 & 0.6830
\end{array}$$

Question

A company wishes to buy new equipment for $85,000.The equipment is expected to generate an additional $35,000 in cash inflows for four years.All cash flows occur at year-end.A bank will make an $85,000 loan to the company at a 10% interest rate so that the company can purchase the equipment.Use the table below to determine break-even time for this equipment.
$$\begin{array} { c c } 
\text { Year } & \text { Present Value } \
& \text { of 1 at } 10 \% \
0 & 1.0000 \
1 & 0.9091 \
2 & 0.8264 \
3 & 0.7513 \
4 & 0.6830
\end{array}$$

Quizplus · Accepted Answer

$
\begin{array}{ccccc}
&& && && && \text{Cumulative}\
&& \text{Cash}&&  \text{Present Value}&&\text{PV of Cash} &&\text{PV of Cash}\
\text { Year } && \text{ Flows}&&   \text{of 1 at 10 \%} && \text{Flows}&&\text{Flows}\
0 &&  \$(85,000) && 1.0000&& \$(85,000)&&\$(85,000)\ 
1 && 35,000 && 0.9091&& 31,818 &&(53,182)\
2 && 35,000 &&0.8264 && 28,924&&(24,258) \
3 && 35,000  &&0.7513  && 26,925&&2,667 \
4 && 35,000 && 0.6830&& 23,905&&26,572
\end {array}
$ Break-even time is between 2 and 3 years (2 years + 24,258/26,925 = 2.90 years)

A Company Wishes to Buy New Equipment for $85,000 A) Break-Even Time Is Longer Than 4 Years