Deck 11: Breakeven and Sensitivity Analysis

Question 1

A distribution center wants to evaluate an alternative product tracking system. The system has an initial cost of $500,000 and a salvage value of $80,000 at the end of its useful life of 7 years. The operating cost is estimated to be $550 per metric ton of product moved per day. The center can handle between 30 and 50 tons per day. Analyze the sensitivity of the PW to changes in a 10- metric- ton increment of product moved. Use an interest rate of 3% per year and 200 days of work per year.

Answer 1

PW30(3%) = - $20,994,942.00 PW40(3%) = - $27,848,272.00 PW50(3%) = - $34,701,602.00

Question 2

Two different machines are under consideration for a reengineering project. Machine X is expected to have an initial cost of $74,000 and an expected life of 7 years. It will have a fixed cost of $10,000 per year and a variable cost of $60 per unit per year. Process Y is expected to have a useful life of 9 years. It will have a fixed cost of $8500 per year and a variable cost of $57 per unit per year. Determine the amount the company can spend on Machine Y so the two machines will break even at an interest rate of 11% per year. Assume the current process capacity of 150 units per year is used for the analysis.

Answer 2

Initial cost of machine Y = $97,745.29

Question 3

Two processes are under consideration for a certain production. Process A requires acquisition of a new machine that is estimated to have an initial cost of $65,000 and a salvage value of $52,000 at the end of its useful life of 6 years. In addition, the process requires a fixed cost of $47,000 per year and a variable cost of $250 per day. Alternatively, Process B requires the use of human labor. The process will need 6 workers, each earning
$200 per day and will have a fixed cost of $36,000 per year and additional variable costs of
$200 per day. Determine the minimum number of days per year required for the two processes to break even at an interest rate of 2% per year.

Answer 3

12.49 days per year

Question 4

The estimated cash flows of an investment project are shown below. Using an interest rate of 2% per year, analyze the sensitivity of the PW to changes in initial investment and annual revenue, and determine the breakeven percentage changes of these two factors.

Question 5

Ginger has agreed to a lawsuit settlement of $600,000 with a certain pharmaceutical company. The company has offered options to pay her the awarded money. After discussing the terms with the company, she expects that the company should be able to pay her back within 3- 5 years. Ginger has developed the following estimates. Which option should she select, if her personal MARR is 13% per year?

Question 6

Two machines are under consideration for a new production line. Machine X costs $50,000 and is expected to have a salvage value of $6500 at the end of its useful life of 5 years. It will have a fixed cost of $16,000 per year and a variable cost of $55 per unit per year. On the other hand, machine Y costs $55,000 and is expected to have a salvage value of $7000 at the end of its useful life of 7 years. It will have a fixed cost of $14,500 per year and a variable cost of $58 per unit per year. Determine the quantity that must be produced for the two machines to break even at an interest rate of 3% per year.

Question 7

Cougar Telemarketing is considering establishing a call center. The initial cost will be
$2,750,000 with a $27,500 market value any time within a 13- year period. The fixed cost of the center will be $830,000 per year with an average variable cost of $3.00 per call. Cougar expects to generate revenue of $5.25 per call with a capacity of 110,000 calls for the first year. The company also expects to increase the capacity uniformly each year. At an interest rate of 2% per year, determine the uniform amount the capacity must increase each year so that the company can recover its investment in 3 years.

Question 8

A manufacturer of an inspecting and profiling web controller has a fixed cost of $83,000 per year and variable costs of $60 per unit produced. If the product is sold at $90 per unit, determine the breakeven quantity per year for the company.

Question 9

Wolfpack, Inc., a textile manufacturing company, is considering opening a production and shipping facility to keep up with demand for its pillows. The facility is expected to require an initial investment of $190,000 and will have a $36,000 salvage value after 5 years. Net annual revenue is estimated to be $100,000. Determine how sensitive the decision to invest in the new facility is to the estimates of initial cost and net annual revenue. Use a MARR of 4% per year and a 5- year study period.

Question 10

The estimated cash flows of an investment project are shown below. Using a MARR of 14% per year, determine the AW for each of the three estimation conditions.