Question

The cost of equipment to apply epoxy paint to a warehouse floor is $1,400. Materials and supplies (masking tape, surface repair material, solvents, cleanup supplies, etc.) will cost $2.03 per ft2. Alternatively, a contractor can be hired annually to do the job for $3.25 per ft2. If the cost of the equipment will be recovered at i = 10% per year over a three-year period with no salvage value, the number of square feet that must be treated each year to justify the equipment purchase is closest to:
A. 1148 ft^2
B. 953 ft^2
C. 2457 ft^2
D. 460 ft^2.

Answer 1

Answer:

D. 460 ft^2

Explanation:

Given That:

Cost of Equipment Purchased = $ 1400

useful life = 3 years

recovery rate of equipment =10%

Materials & Supplies cost ( Variable cost) = $ 2.03 / Sq.ft

If the Work is alternatively taken care (hired) by the contractor  

Amount payable to contractor for the job ( variable cost ) = $ 3.25 / Sq.ft

Now;

Savings in Variable cost due to purchase of Equipment ( $ 3.25 - $ 2.03) = $ 1.22

Equipment cost to be recovered per year = Cost of Equipment / PVAF ( r%, n years)

= $ 1,400 / PVAF ( 10%, 3years)

= $ 1,400 / 2.49

= $ 562.25

Minimum usage required = Cost of equipment to be recovered per year / Savings in variable

= $ 562.25 / $ 1.22

= 460.85

Minimum usage to be worth for purchasing equipment = 460 ft²