Nestor Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Compute the
break-even time (BET) period for this investment.
$\begin{array}{rrr}
&\text {Annual Net }&\text {Present Value}\
&\text {Cash Flows}&\text { of $ \$ 1 $ at $ 10 \% $}\
\text { Year 0 } & & 1.0000\
\text { Year 1 } & \$ 40,000 &.9091 \
\text { Year 2 } & \$ 40,000 & .826 \
\text { Year 3 } & \$ 35,000 &.7513 \
\text { Year 4 } & \$ 35,000 &.6830 \
\text { Year 5 } & \$ 30,000 & .6209
\end{array}$

A) 2.98 years.
B) 3.18 years.
C) 3.62 years.
D) 2.85 years.
E) 2.57 years.

Question

Nestor Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Compute the
break-even time (BET) period for this investment.
 $\begin{array}{rrr}
&\text {Annual Net }&\text {Present Value}\
&\text {Cash Flows}&\text { of $ \$ 1 $ at $ 10 \% $}\
\text { Year 0 } & &  1.0000\
\text { Year 1 } & \$ 40,000 &.9091 \
\text { Year 2 } & \$ 40,000 & .826  \
\text { Year 3 } & \$ 35,000 &.7513  \
\text { Year 4 } & \$ 35,000 &.6830 \
\text { Year 5 } & \$ 30,000 & .6209
\end{array}$
  
A) 2.98 years.
B) 3.18 years.
C) 3.62 years.
D) 2.85 years.
E) 2.57 years.

Quizplus · Accepted Answer

The break-even time (BET) period is the time it takes for the cumulative present value of cash flows to equal the initial investment. Calculating the present value of each year's cash flow and summing them, we find that the cumulative present value reaches $100,000 between years 3 and 4. Interpolating between these years gives a BET of approximately 3.18 years.

Nestor Company Is Considering the Purchase of an Asset for $100,000