Company wishes to buy new equipment for $9,000. The equipment is expected to gen

Question

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.

Explanation / Answer

Answer : break-even time in years = 4 year and 26 days

Working notes for the above answer is as under

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

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