Process A requires equipment with a first cost of 300,000 QAR having a salvage v

Question

Process A requires equipment with a first cost of 300,000 QAR having a salvage value of 100,000 QAR in 5 years. The fixed cost per year is 28,806 QAR with a variable cost of 200 QAR/unit. On the other side, Process B requires no purchase of equipment, but will involve a cost of 1,000 QAR/unit. Determine the number of units that must be manufactured per year in order for the two processes to break even. Use an interest rate of 5% per year and the AW relations as function of common variable for each alternative.

Explanation / Answer

Process A Process B Initial Cost        -3,00,000                  -   Salvage Value          1,00,000                  -   Life (Years)                        5 Fixed Cost              28,806 V.C.                    200           1,000 Interest Rate 5% 5% Year Capital flows Fixed Cost Total Cost Disc Factor PV Variable cost 0           -3,00,000 -3,00,000     -3,00,000 1              28,806       -28,806 0.952381        -27,434 -200x 2              28,806       -28,806 0.9070295        -26,128 -200x 3              28,806       -28,806 0.8638376        -24,884 -200x 4              28,806       -28,806 0.8227025        -23,699 -200x 5             1,00,000              28,806         71,194 0.7835262          55,782 -200x 4.3294767     -3,46,362 EUAC -80,000.96 -200x -80000.96-200x=-1000x 80000.96=800x x=100 units

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