A firm is considering two different methods of solving a production problem. Bot

Question

A firm is considering two different methods of solving a production problem. Both methods are expected to be obsolete in six years. Method A would cost $ 80,000 initially and have annual maintenance costs of $ 22,000. Method B would cost $52,000 initially and have annual maintenance costs of $17,000. The salvage value realized with Method A would be $20,000 and with Method B would be $15,000. Method B would cost 2 times for annual operation more than Method A. The firm’s MARR is 10%. Perform breakeven analysis.

Explanation / Answer

for method A

= -80000(A/P,10%,6) + 20000(A/F,10%,6) – 22000-x(annual operation)

=-15776.44-22000-x

=-37776.44-x

for method B

=-52000(A/P,10%,6) + 15000(A/F,10%,6) – 17000-2x(annual operation)

=-9995.47-17000-2x

=-26995.47-2x

equating the two equations

x=10781

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