Microsurfacing is part of a pavement restoration and maintenance program that seals the surface of a street that has minor cracking to prevent water from penetrating into the base material. The annual cost of equipment (trucks, tanks, valves, etc.) is $109,000 per year and the material cost is $2.75 per square yard. Alternatively, regular street resrufacingrequires equipment that has a first cost of $225,000 with a 15-year life and no salvage value. The variable cost for regular resurfacing is $13 per square yard. At an interest rate of 8% per year, how many square yards per year must be resurfaced for the two methods to breakeven?
This is mostly an accounting problem! I'm not an accountant, but will take a crack at it!
There are as many as half a dozen methods of depreciating an asset, but I'm going to use the method of amortization of the $225,000 initial expenditure at the given rate of 8%. When you amortize it over 15 years, you get an equal annual depreciated amount of $26,286.65.
Let the number of square yards paved, in both given scenarios in the question = Y, then we have this:
$109,000 + $2.75Y = $26,286.65 + $13Y, solve for Y
$109,000 - $26,286.65 =$13Y - $2.75Y
$82,713.35 = $10.25Y
Y = $82,713.35 / $10.25
Y = ~8,070 Square yards for the 2 methods to break even.
Note: It depends on the depreciation method you use, the answer will be different in each case. Use the method that is recommended in your textbook, or by your teacher.
