Question

Development of a new computer network requires $1,007,324 as first costs and $45,051 per year as operating costs. It will be in operation for the next 5 years bringing $542,338 as annual revenue over this period. It is also known that MARR is 15%, and the depreciation rate associated with the first cost is 20%. If you are asked to construct sensitivity graphs for (-20%, +20%) interval, what will be the slope of the line associated with operating costs in this interval?

Answer 1

The initial cost for the set up of the computer network = $1,007,324

Operating cost per year for 5 years = $45,051 x 5

                                                                 = $225,255

Depreciation cost associated with the first cost = 20% of initial cost $1,007,324

                                                                                     = $201,464

Therefore, the total cost of production = $1,007,324 + $225,255 + $201,464

                                                                       = $1,434,043

Now, the revenue generated from this computer network for 5 years = $542,338 x 5

                                                                                                                            = $2,711,690

Therefore, the revenue generated from the production is handsome.

Let us see below the sensitivity graph for (-20%, +20%) interval:

                                   As we can see from the graph above, the curve AB shows the slope of the operating cost before the interval and the curve BC represents the operating cost after the interval. The slope of the curve will be an upward sloping curve with variations in the slope due to the depreciation involved in the total cost.