Answered: Present Value of 1 at 10% Present Value…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

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 $90,000 and is expected to generate an additional $35,000 in cash flows for five years. A bank will make a $90,000 loan to the company at a 10% interest rate for this equipment’s purchase. Use the following table to determine the break-even time for this equipment. (Round the present value of cash flows to the nearest dollar.)

Present Value
of 1 at 10%
Present Value
of Cash Flows
Cumulative Present Value
Year
Cash Flows
of Cash Flows
$190,000)
1.0000
1
35,000
0.9091
2
35,000
0.8264
3
35,000
0.7513
4
35,000
0.6830
35,000
0.6209
*All cash flows occur at year-end.

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