Company X has been contracting its overhauling work to Company Y for $31,000 per machine per year. Company X estimates that by building a $491,000 maintenance facility with a life of 17 years and a salvage value of $90,000 at the end of its life, it could handle its own overhauling at a cost of only $17,000 per machine per year. What is the minimum annual number of machines (as an integer) that Company X must operate to make it economically feasible to build its own facility? (Assume an interest rate of 15%.) Hint: calculate the annual equivalent cost of the maintenance facility.
Computation of EAC in case of buildin maintenance facility:
EAC = PV of net cash out flows / PVAF ( r% , n years )
where r is int rate & n is no. of years
PV of net cash outflows:
EAC = – 5793,44.70 / 5.8474
It should have atleast 4 machines, then only the EAC paid to company Y (31,000 * 4 = $124,000 ) will be more and building maintenance facility will be economical.