Question

Paul Scott has a 2014 Cadillac that he wants to update with a satellite-based emergency response system so that he will have access to roadside assistance should he need it. Adding this feature to his car requires a flat fee of $500, and the service provider requires monthly charges of $20. In his line of work as a traveling salesperson, he estimates that this device can save him time and money, about $35 per month. He plans to keep the car for another 3 years.

Required:
a. Calculate the breakeven point for the device in months.
b. Based on a, should Paul have the GPS system installed in his car?

Answer 1

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Answer 2

Answer to part A:

Cost incurred = $500

Monthly Charges = $20

Savings per month = $35

Net Savings = $35 - $20 = $15

Breakeven point for the device in months

= Point where there is no profit or loss

= Number of months required to get the investment back

= Investment / Net Savings per month

= $500 / $15

= 33.33 months

Answer to Part B:

As the investor wants to keep the GPS system for 3 years,

Profit = (36 months - 33.33 months) * net savings

= 2.67 * $15

= $ 40

As the investor is able to earn profits from GPS system, he should install it in his car.