To produce an item, equipment costing $250,000 must be purchased. It will have a

Question

To produce an item, equipment costing $250,000 must be purchased. It will have a life of 4 years and an annual cost of $80,000; each unit will cost $40 to manufacture. Buying the item externally will cost $100 per unit. Assume i=12% per year. Decision makers would like to determine the breakeven production number per year at which both methods are equivalent.

-Determine the PW equation for option 2 (Buying the item externally), Where X is the number of units per year.

PW2= 250,000+ 100X

Which one of these is the answer?

Explanation / Answer

The PW equation implies the Present Worth equation for the planned expenditure to produce the item. For option 2 where the item is bought externally at a cost of $100 per unit, the PW eqaution would be:

PW2=100X(P/A,12%,4)

using the functional form

F=PV(1+i)n

PV= F/(1+i)n

where F=Future Value, n=Number of years and PW is the present worth

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