Julia must choose between two different designs for a safety enclosure.
Model A has a life of three years, has a first cost of S8000, and requires maintenance of $1000 per year. She believes that a salvage value can be estimated for model A using a depreciation rate of between 30% and 40% and declining-balance depreciation.
Model B will last four years, has a first cost of $10 000, and has maintenance costs of $700 per vear. A salvage value for model B can be estimated using straight-line depreciation and the knowledge that after one year the salvage value will be $7500. Interest is at 11%. Which of the two models would you suggest Julia choose?
What break-even depreciation rate for model A will make her indifferent between the two models? Construct a sensitivity graph showing the break-even depreciation rate.