Alpha Electronics can purchase a needed service for 85 per u

Alpha Electronics can purchase a needed service for $85 per unit. The same service can be provided by equipment that costs $95,000 and that will have a salvage value of zero at the end of 10 years. Annual operating costs for the equipment will be $7,000 per year plus $30 per unit produced. MARR is 16.0%/year. Click here to access the TVM Factor Table Calculator What is the future worth of the equipment if the expected production is 200 units/year? $ What is the future worth of the equipment if the expected production is 500 units/year? $ Determine the breakeven value for annual production that will return MARR on the investment in the new equipment?

Solution

If you produce 200 units a year, annual savings from using the machine = [200 x ($85 - $30)] – $7,000 = $4,000

Future Value = FV(rate = 16%, nper = 10, pmt = 4,000, pv = -95,000, 0) = -$333,846 (Costs)

If you produce 500 units, savings = 500 x (85 - 30) – 7,000 = 20,500

Future Value = FV(rate = 16%, nper = 10, pmt = 18,003.79, pv = -95,000, 0) = $18,003.79 (Savings)

Break-even units is the number of units when FV = 0.

At 485 units per year, the FV is closer to 0.