A company wishes to buy new equipment for $9,000. The equipment is expected to generate an additional $2,800 in cash inflows for six years. All cash flows occur at year-end. A bank will make a $9,000 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.
$$\begin{array} { c c }
\text { Year } & \begin{array} { c }
\text { Present Value } \
\text { of } 1 \text { at } 10 \%
\end{array} \
0 & 1.0000 \
1 & 0.9091 \
2 & 0.8264 \
3 & 0.7513 \
4 & 0.6830 \
5 & 0.6209 \
6 & 0.5645
\end{array}$$

Question

A company wishes to buy new equipment for $9,000. The equipment is expected to generate an additional $2,800 in cash inflows for six years. All cash flows occur at year-end. A bank will make a $9,000 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.
$$\begin{array} { c c } 
\text { Year } & \begin{array} { c } 
\text { Present Value } \
\text { of } 1 \text { at } 10 \%
\end{array} \
0 & 1.0000 \
1 & 0.9091 \
2 & 0.8264 \
3 & 0.7513 \
4 & 0.6830 \
5 & 0.6209 \
6 & 0.5645
\end{array}$$

Quizplus · Accepted Answer

The present value of cash inflows for each year is calculated and summed until it equals the initial investment of $9,000. The cumulative present value reaches $9,000 between years 4 and 5.

A Company Wishes to Buy New Equipment for $9,000 A) Break-Even Time Is Between 2 and 3 Years