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.
$$\begin{array} { c c }
\text { Year } & \begin{array} { c }
\text { Present Value } \
\text { of } 1 \text { at } 10 \%
\end{array} \
0 & 1.0000 \
1 & 0.9091 \
2 & 0.8264 \
3 & 0.7513 \
4 & 0.6830
\end{array}$$

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.
$$\begin{array} { c c } 
\text { Year } & \begin{array} { c } 
\text { Present Value } \
\text { of } 1 \text { at } 10 \%
\end{array} \
0 & 1.0000 \
1 & 0.9091 \
2 & 0.8264 \
3 & 0.7513 \
4 & 0.6830
\end{array}$$

Quizplus · Accepted Answer

The present value of the cash inflows is $35,000 x 2.4869 = $86,991.50. The break-even time is between 2 and 3 years because the present value of the cash inflows is greater than the cost of the equipment.

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