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?

Guest Jul 9, 2017

#1**0 **

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.

Guest Jul 9, 2017