Question

A large city in the mid-West needs to acquire a street-cleaning machine to keep its roads looking nice year round. A used cleaning vehicle will cost $75,000 and have a $20,000 market (salvage) value at the end of its five-year life. A new system with advanced features will cost $150,000 and have a $50,000 market value at the end of its five-year life. The new system is expected to reduce labor hours compared with the used system. Current street-cleaning activity requires the used system to operate 8 hours per day for 20 days per month. Labor costs $40 per hour, and MARR is 12% per year (1% per month). a) Find the breakeven percent reduction in labor hours for the new system. b) The best estimate for the reduction of labor hours for the new system is 20% (compared with the used system). Use the incremental cash flow (new system-old system) and spiderplot to Investigate how sensitive the decision is to: changes in the MARR, changes in the market value of the new system, and changes in the productivity improvement of the new system. Use a range of -40% to +40% change for each factor

Answer 1

A. A business’s break-even point is the stage at which revenues equal costs.

Once you determine that number, you should take a hard look at all your costs from

rent to labor to materials as well as your pricing structure.

B.

• Changing Consumer Tastes. Consumer tastes are constantly changing.
• Countering Competitive Strategies.
• Product Life Cycle.
• Considerations.