Question

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

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 \$111,000 and is expected to generate an additional \$44,000 in cash flows for 5 years. A bank will make a \$111,000 loan to the company at a 12% interest rate for this equipment’s purchase and compute the recovery time for both the payback period and break-even time. (PV of \$1, FV of \$1, PVA of \$1, and FVA of \$1) (Use appropriate factor(s) from the tables provided.)

part a)

Compute the recovery time for the payback period.

 Payback Period Choose Numerator: / Choose Denominator: = Payback Period / = Payback period = 0

part b)

Compute the recovery time for the break-even time. (Cumulative net cash outflows must be entered with a minus sign. Round your Break-even time answer to 1 decimal place.)

 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 =

 payback period Choose Numerator / Choose Denominator = Payback period Cost of investment / Annual net cash flow = Payback period 111,000 / 44,000 = 2.52 Chart values are Based on: i= 12% Cash inflow/ Table PV of Cumulative Year outflow factor cash flows PV 0 -111,000 1 -111000 -111000 1 44,000 0.89286 39286 -71714 2 44,000 0.79719 35076 -36638 3 44,000 0.71178 31318 -5319 4 44,000 0.63552 27963 22643 5 44,000 0.56743 24967 47610 Break even time= 3.2 years