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. Dodd-Franks Bank will make a $9,000 loan to the company at a 10% interest rate so that the company can purchase the ethically-sourced equipment. Required: Determine break-even time in years (rounding to two decimals) for this equipment.
year 1 0.9091
year 2 0.8264
year 3 0.7513
year 4 0.6830
year 5 0.6209
year 6 0.5645
year 7 0.5132
year 8 0.4665
Please explain this problem in detail. I am having serious problems understanding how do do this. Thanks.
Answer : break-even time in years = 4 year and 26 days
Working notes for the above answer is as under
| Particular | Amount in$ |
| new equipment | 9000 |
| additional Cash | 2800 |
| Year | Cash inflow | Discounting factor |
Prasent Value |
Incremental PV |
| 1 | 2800 | 0.9091 | 2545.455 | 2545.454545 |
| 2 | 2800 | 0.8264 | 2314.05 | 4859.504132 |
| 3 | 2800 | 0.7513 | 2103.681 | 6963.185575 |
| 4 | 2800 | 0.6830 | 1912.438 | 8875.62325 |
| 5 | 2800 | 0.6209 | 1738.58 | 10614.20295 |
| 6 | 2800 | 0.5645 | 1580.527 | 12194.72996 |
| 7 | 2800 | 0.5132 | 1436.843 | 13631.57269 |
| 8 | 2800 | 0.4665 | 1306.221 | 14937.79335 |
For BEP we near $ 9,000 cash inflow of 9000 . Up to a year company has received $ 8875.92
in the fifth year it reached to $ 10614.2 but we actually need $ 9000 so balancing amount is
=9000-8875.92
=124.38
During 365 days company earn $ 1738.58 so 124.38 in how many days
=124.38*365 /1738.58
=26.11 days
So break-even time in years is 4 year and 26 days
