An online commercial directory service must de­cide between composing the ads for its clients in-house or paying a production company to compose them. To develop the ads in-house, the company will have to purchase computers, printers, and a database management system at an estimated cost of $42,000. This equipment will have a useful life of 3 years, after which it will be sold for $2000. The employee who creates the ads will be paid $55,000 per year. In addition, each ad will have an average cost of $10. Alternatively, the company can outsource development at a flat fee of $21 per ad. At an interest rate of 10% per year, how many ads must the company sell each year for the op­tions to just break even?

Question

What will be an ideal response?

Answer 1

Let x = ads per year
-21x = -42,000(A/P,10%,3) -55,000 + 2000(A/F,10%,3) – 10x
-21x = -42,000(0.40211) -55,000 + 2000(0.30211) – 10x
-11x = -71,284
x = 6480