2. Payback Period/Breakeven A. You purchase a new dozer for $214,000 and you exp

Question

2. Payback Period/Breakeven

A. You purchase a new dozer for $214,000 and you expect that it will increase your productivity enough to earn you $8,500 per month. The manufacturer has informed you that there is a maintenance cost for this machine of $1,095 after the first month, which increases by $15 every month thereafter. How long will it take for you to break even for this investment? Assume an APR of 12% compounded monthly and no salvage value.

B. You purchase a new tractor for $110,000 and you expect that it will increase your productivity enough to earn you $18,500 per year. The manufacturer has informed you that there is a maintenance cost for this machine of $8,050 after the first year, which increases by 1% each year thereafter. The salvage value is $80,000 minus 2% per year, would you have broken even on this investment after 5 years? Assume an APR of 6% compounded yearly

Explanation / Answer

As in the above table, we can see that in 36th month the Present value of earnings = Initial investments, thus breakeven point or payback period is 36 months.

Question A) Initial Outlay = 214000 Excess earnings Maintainance Cost Net Earnings Present Value Cumulative Present Value (A) (B) (C)=(A)-(B) (Net Earnings /(1.01)^no of months) month 1 8500 1095 7405 7331.68 7331.68 month 2 8500 1110 7390 7244.39 14576.07 month 3 8500 1125 7375 7158.10 21734.17 month 4 8500 1140 7360 7072.82 28806.99 month 5 8500 1155 7345 6988.52 35795.50 month 6 8500 1170 7330 6905.19 42700.70 month 7 8500 1185 7315 6822.83 49523.53 month 8 8500 1200 7300 6741.43 56264.96 month 9 8500 1215 7285 6660.97 62925.92 month 10 8500 1230 7270 6581.44 69507.36 month 11 8500 1245 7255 6502.83 76010.19 month 12 8500 1260 7240 6425.13 82435.32 month 13 8500 1275 7225 6348.34 88783.66 month 14 8500 1290 7210 6272.43 95056.09 month 15 8500 1305 7195 6197.41 101253.50 month 16 8500 1320 7180 6123.26 107376.75 month 17 8500 1335 7165 6049.96 113426.72 month 18 8500 1350 7150 5977.52 119404.24 month 19 8500 1365 7135 5905.92 125310.17 month 20 8500 1380 7120 5835.16 131145.32 month 21 8500 1395 7105 5765.21 136910.54 month 22 8500 1410 7090 5696.08 142606.61 month 23 8500 1425 7075 5627.75 148234.37 month 24 8500 1440 7060 5560.22 153794.58 month 25 8500 1455 7045 5493.47 159288.05 month 26 8500 1470 7030 5427.50 164715.55 month 27 8500 1485 7015 5362.29 170077.84 month 28 8500 1500 7000 5297.85 175375.69 month 29 8500 1515 6985 5234.15 180609.85 month 30 8500 1530 6970 5171.20 185781.05 month 31 8500 1545 6955 5108.98 190890.03 month 32 8500 1560 6940 5047.49 195937.52 month 33 8500 1575 6925 4986.71 200924.24 month 34 8500 1590 6910 4926.65 205850.88 month 35 8500 1605 6895 4867.28 210718.16 month 36 8500 1620 6880 4808.60 215526.76 month 37 8500 1635 6865 4750.61 220277.38 month 38 8500 1650 6850 4693.30 224970.68 month 39 8500 1665 6835 4636.66 229607.34 month 40 8500 1680 6820 4580.67 234188.01 month 41 8500 1695 6805 4525.35 238713.36 month 42 8500 1710 6790 4470.66 243184.02

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