Question

Company X has been contracting its overhauling work to Company Y for $40,000 per machine per year. Company X estimates that by building a $500,000 maintenance facility with a life of 15 years and a salvage value of $100,000 at the end of its life, it could handle its own overhauling at a cost of only $30,000 per machine per year. What is the minimum annual number of machines that Company X must operate to make it economically feasible to build its own facility? (Assume an interest rate of 10%.)

Answer 1

Answer:

M = 2.08 machine

Explanation:

$CR(10\%) = ( 500,000 - 100,000)(A/P,\ 10\%,15) + 0.1\times 100,000$

(A/P, 10%,15) is calculated from compound interest tables

               =  400,000 (0.1315) + (10000)

               = $62600

Let M be number of machines

$AE_{saving}(10\%) = ( 40,000 - 10,000) M$

AE(10%) = ($40,000 - 10,000) M - $62600 = 0

SOLVING FOR M

30000 M = 62600

M = 2.08 machine