Berkshire Controllers usually finances its engineering projects with a combination of debt and equity capital. The resulting MARR ranges from a low of 4% per year, if business is slow, to a high of 10% per year. Normally, a 7% per year return is expected. Also the life estimates for assets tend to go down about 20% from normal in a vigorous business environment and up about 10% in a receding economy. The following estimates are the most likely values for two expansion plans currently being evaluated. Plan A will be executed at one location; Plan B will require two locations. All monetary estimates are in $1000 units.

Plan B

Plan A Location 1 Location 2

First cost, $ -$10,000 -$30,000 -$5,000

AOC, $ per year -$500 -$100 -$200

Salvage value, $ 1,000 $1,000 -$200

Estimated life, years 40 40 20

Questions:

At the weekly meeting, you were asked to examine the following questions from Berkshire's president:

1. Are the PW values for plans A and B sensitive to changes in the MARR?

2. Are the PW values sensitive to varying life estimates?

3. Is the breakeven point for the first cost of plan A sensitive to the changes in MARR as business goes from vigorous to receding?