Signature Jocelyn, the owner o complete a contract awarded to her company. The f

Question

Signature Jocelyn, the owner o complete a contract awarded to her company. The first cost of the equipment is $250,000 with a life of 3 years at which time she will no longer need the equipment. The operating cost is expected to be $75,000 per year. Alternatively, a subcontractor can perform the work for $175,000 per year. Because the equipment is specialized, Jocelyn is not sure about the salvage value. She estimates a likely salvage of $90,000, but it might have to be scrapped for as little as $10,000 in three years. The MARR is 15% per year. f a construction company, is planning to purchase specialized equipment to a. b. Is her decision to buy the equipment sensitive to the salvage value? Determine the salvage value at which the two alternatives break even.

Explanation / Answer

Solution:-

Buy Equipment:- scrap 90000

250000+75000*2.2832(PVAF @15%) - 90000*0.6575 (PVIF)

=362065

Buy Equipment:- scrap 90000

250000+75000*2.2832(PVAF @15%) - 10000*0.6575 (PVIF)

=414665

Subcontract:-

175000*2.2832 = 399560 ( Assuming Subcontract payment is made at the end of the year)

Yes Salvage value is sensitive to buy the equipment

(b) Break Even:-

Let "x" be the scrap value

250000 + 75000*2.2832 - 0.6575x = 399560

x = 32973.38

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