Question 1 Snow Valley Ski Resort has been contracting snow removal from its par

Question

Question 1 Snow Valley Ski Resort has been contracting snow removal from its parking lots at a cost of $310/day. A snow-removal machine can be purchased for $25,000. The machine is estimated to have a useful life of 6 years with a zero salvage value at that time. Annual costs for operating and maintaining the equipment are estimated to be $7,000. Determine the break-even value for the number of days per year that snow removal is required in order to justify purchasing the snow-removal machine. MARR is 12%/year. Break-even value: Carry all interim calculations to 5 decimal places and then round your final answer up to the nearest day. The tolerance is ±1 Click here to access the TVM Factor Table Calculator days

Explanation / Answer

First step is to calculate the annual cost when the snow removal machine is purchased.

Cost of the Machine - 25,000

Useful Life - 6 Years

Salvage Value after usefule life - 0

Therefore, Annual Depreciation = 25000/6 = $4166.67

Also, Annual Operations & Maintenance (O&M) Cost = $7000

So, Total Annual Cost = 4166.67+7000 = $11,166.67

It is also mentioned that Minimuim Acceptable Rate of Return (MARR) = 12% (of investment)

So, Amount required to meet MARR criterion = 12% of 25,000 = $3,000

Therefore, total annual cost + MARR = $11,166.67 + $3,000 = $14,166.67

Second step is to calculate the breakeven no. of days which will lead to the same cost of $14,166.67

Cost per day = $310

Let the no. of days be 'x' days

Then, Annual Cost = 310x

To achieve breakeven; 310x = 14,166.67

Therefore, x = 45.7 or 46 days appx.

Thus, Break-even value = 46 days. This means that the decision to invest in a snow removal machine should be made if the snow-removal is required for atleast 46 days in an year.

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