Question

The M2 Corporation is considering expanding its ergonomics consulting business. To do so, several pieces of equipment for performing a given analysis technique must be purchased. The CEO estimates that it will cost $155,000 to expand the business, resulting in $31,000 in revenues per year, $12,000 in expenses per year, and a salvage value of $3000. If the useful life of the expansion is expected to be 15 years, and the Corporation’s MARR is 15%. a. Should they undertake the expansion? You must use the Benefit/Cost Ratio to receive ANY credit. b. What would the break-even point be for annual revenues for this problem?

Answer 1

Solution :-

Initial Cost = $155,000

Annual Expenses Per Year = $12,000

Therefore Present value of Cash Outflow = $155,000 + $12,000 * PVAF( 15% ,,15 )  

= $155,000 + ( $12,000 * 5.847 )

= $225,168.44

Annual Revenue = $31,000

Salvage Value = $3,000

Now Present value of Cash Inflows = $31,000 * PVAF(15%,15) + $3,000 * PVAF(15%,15)

= ( $31,000 * 5.847 ) + ( $3,000 * 0.1229 )

= $181,637.20

Now Benefit Cost Ratio = PVCI / PVCO = $181,637.20 / $225,168.44 = 0.8066 times

As we see the Benefit Cost Ratio is less than 1

So they should not undertake the expansion

As for the acceptability of the project Benefit cost ratio is greater than equal to 1

(b)

Breakeven for annual revenue for this Problem =

Let Annual Revenue be $X

PVCO = PVCI

$225,168.44 = $X * PVAF(15%,15) + ( $3,000 * 0.1229 )

$X * 5.847 = 224,799.80

$X = $224,799.80 / 5.847

$X = $38,444.59

Therefore for the break even annual revenue should be $38,444.59

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