James, the plant manager at Global Foundries (GF), received estimates from two contractors to improve traffic flow and repave the parking areas at his production facility. Proposal A includes new curbs, grading, and paving at an initial cost of $250,000. The expected life of the parking lot surface is 4 years with annual costs for mainte­nance and repainting of strips of $3000. Accord­ing to proposal B, the pavement has a higher quality and an expected life of 12 years. The an­nual maintenance cost will be negligible for the parking area, but the markings will have to be re­painted every 2 years at a cost of $5000. The MARR is 12% per year. (a) How much can GF afford to spend on proposal B for the two propos­als to break even? (b) Proposal B first cost came in at $700,000. Now, what

Question

is the breakeven initial cost for proposal A, if all other estimates are correct?

What will be an ideal response?

Answer 1

(a) Set AWA = AWB, with PB = first cost of B. The final term in AWB removes the
repainting cost in year 12 only.
AWA = AWB
-250,000(A/P,12%,4) -3000 = -PB(A/P,12%,12) - 5000(A/F,12%,2) + 5000(A/F,12%,12)
-250,000(0.32923) -3000 = -PB(0.16144) - 5000(0.47170) + 5000(0.04144)
-85,308 = -PB(0.16144) -2151
-83,157 = -PB(0.16144)
PB = $515,095
(b) Set PB = -700,000 and solve for PA
AWA = AWB
-PA(A/P,12%,4) -3000 = -700,000(A/P,12%,12) - 5000(A/F,12%,2) + 5000(A/F,12%,12)
-PA(0.32923) -3000 = -700,000(0.16144) - 5000(0.47170) + 5000(0.04144)
-PA(0.32923) = -112,159
PA = $340,671