CE 167: Engineering and Project Management
Professor William Ibbs
Fall 2011
Homework 3: Break Even, Sensitivity, Bonds, Decision Trees
25 Points
Due: Sept. 6, 2011
REMEMBER:
ALWAYS DRAW YOUR CASH FLOW DIAGRAM
1.
[5 Points]
Your construction firm is considering investing in a ready-mix concrete plant in
order to provide alternative revenue streams, and you wish to know if the plant will be
profitable.
A plant costs $4,710,400 in capital investment, and the variable O&M costs are
$40.52 per cubic yard of concrete produced.
The current market price for RMC is $65.00
per cubic yard.
If before-tax MARR is 20%, how many yards of concrete must be sold to
break-even if the plant will last 20 years and can be scrapped for $492,600, and graph the
results showing the change in cash flows as you sell more or less concrete? What is the
undiscounted payback period at the breakeven point?
First, find the equivalent annual fixed cost of the investment:
A
= -4,710,400(A/P, 20%, 20) + 492,600(A/F, 20%, 20)
=-4,710,400(0.20536) + 492,600(0.00536) = -$969,968
Solve Algebraically to find the breakeven point:
$969,968 + $40.52B = $65B
B = 39,623 yd
3
Net Revenue (annual) = ($65-$40.52) * 39,623 = $969,968
Undiscounted Payback?