Your company is considering the purchase of new earth movingequipment. The total

Question

Your company is considering the purchase of new earth movingequipment. The total
purchase is $240,000 and we pay with $100,000 cash and borrow therest. (12% per year
nominal, compounded monthly for 5 years). The machines last for 7years and will be
worth $35,000 at the end of 7 years. The machines will saveapproximately $20 per ton of
dirt moved. Operating costs for the equipment are $500 per month.At the end of year 3,
you will have to do an overhaul and that costs $30,000. Assume thatMARR is 1.5% per
month and ignore the effect of taxes and depreciation.

Set up the equation and solve for the break even monthly tons ofdirt moved
to justify the purchase of the new machines

I have been given the equation PW(MARR)=N[Rj-Cj)(P/F, MARR, j)] but have not beengiven any instruction on how to use it.

Mark

Explanation / Answer

86975.5 / 20

Hey Mark, I really have not heard about the equation whichyou have been given. Let's see if we can proceed with the problem alongmy lines. Break Even Point is the point of No Profit NoLoss. It is given by the formula , BEP = Fixed Costs / Unit Contribution There is no ambiguity regarding unitContribution It is $20 per Ton . Now regarding Fixed Costs, Interest Costs 17,755.50 Annual MARR 43,200.00 Operating Costs 6,000.00 Overhauling Costs 10,000.00 ( Now , this is the tricky part. Even though theyare incurred in the third year, they have to beallocated equally over the three years ) Total Fixed Costs 41,444.50 BEP

86975.5 / 20

BEP ( In Tonnes) 4,348.75

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