Question

An automotive company is planning to invest in a new machine for alternators production or alternatively to outsource to a 3rd party for 11 USD cents per alternator. In order to buy the machine they have to take into account the following: Purchase cost: 1800 USD, estimated working period: 4 years, estimated resale value at the end of the 4-year period is 700 USD. The monthly maintenance cost for the machine is 3 USD and the materials used cost per alternator produced is 0,028 USD. For which number of alternators produced the two options (machine purchase or outsourcing) are equal if the current bank interest is 8%?

Answer 1

• As per the question we need to find out the breakeven where machine purchase and outsourcing would be equal.

Purchase of New Machine
Particulars	Amount in USD
Cost	1800
Resale value at the end of 4th year	700
Depreciable value	1100
Depreciation per year	275
Monthly maintenance cost for machine per month	3
Number of months	12
Total maintenance cost per year	36
For all 4 years	144
Material cost per alternator	0.028
Bank interest rate per annum	8%
Bank interest @ 8% in 1800 USD is taken on loan to purchase new machine	144
For 4 years	576
Total cost
Depreciable value	1100
Maintenance cost for 4 years	144
Bank interest	576
Total cost except material cost	1820
Let the number of alternators produced be x
Cost of outsourcing would be	11x
Total cost if new machine is purchased	1820+0.028x
Both the above equations should be equal for indifference

Therefore 11x = 1820+0.028x

Solving the above equation we get

11x-0.028x = 1820

10.972x = 1820

x = 165.87~ 166 alternators

Answer: For 166 alternators the two options are equal