(20 points) A local business has two options for its new recycling plant (shown
ID: 1115955 • Letter: #
Question
(20 points) A local business has two options for its new recycling plant (shown below). One is more efficient than the other. MARR is 20%. Break-even analysis is used to compare the two alternatives. 4. Initial investment at t = 0 Annual fixed cost Net revenue per ton of recycled material Lifetime Alternative A Alternative B $50 million$35 million $4 million $95 15 years $3 million $100 15 years a. (15 points) What is the break-even point in terms of annual tons of material to be recycled? b. (5 points) Which alternative is preferred if the annual recycled material tonnage is 200,000?Explanation / Answer
4.
R = 20%
Time = 15 years
A.
For alternative A:
Let, uniform annual investment = UAC1
Then,
50 million = UAC1*(1-1/(1+R)^n)/R = UAC1*(1-1/1.2^15)/.2 = UAC1* 4.675
UAC1 = $10695187.17
Total annual fixed cost = 10695187.17 + 3000000 = 13695187.17
Breakeven quantity = Total annual fixed cost/ net revenue per ton
Breakeven quantity = 13695187.17/100
Breakeven quantity (Alternative A) = 136951 Tons of recycling
For Alternative B:
Let, uniform annual investment = UAC2
Then,
35 million = UAC2*(1-1/1.2^15)/.2 = UAC2* 4.675
UAC2 = $7486631.02
Total annual fixed cost = 7486631.02 + 4000000 = $11486631.02
Breakeven quantity = Total annual fixed cost/ net revenue per ton
Breakeven quantity = 11486631.02/95
Breakeven quantity (Alternative B) = $120911.91 Tons of recycling
B.
For alternative A:
Annual Net profit = Total annual net revenue - total annual fixed cost = 200000*100 - 13695187.17
Annual Net profit =$6304812.83
For alternative B:
Annual Net profit = Total annual net revenue - total annual fixed cost = 200000*95 - 11486631.02
Annual Net profit = $7513368.98
Since Alternative B is giving more profit than the alternative A, hence alternative B should be selected.
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