Case Study: Break-Even Analysis, Multiple Alternatives

An architectural engineering firm has been asked to prepare preliminary plans for the construction of a one-story commercial building. To arrive at some quantitative basis for recommending a type of construction, the engineering firm develops fixed and variable cost data. These data, given below, are assumed to represent the cost of construction and operation for a building enclosing between 2,000 and 6,000 gross square feet.

Steel:

First cost per square foot                    $72

Annual maintenance                        $14,000

Annual HVAC per square foot                $3.00

Estimated life in years                        20

Estimated sale value is 80% of first cost

Concrete block:

First cost per square foot                    $76

Annual maintenance                        $9,000

Annual HVAC per square foot                $3.40

Estimated life in years                        20

Estimated sale value is 100% of first cost

Frame and brick:

First cost per square foot                    $81

Annual maintenance                        $6,000

Annual HVAC per square foot                $3.90

Estimated life in years                        20

Estimated sale value is 110% of first cost

The MARR is 18%. Determine the breakeven points and draw the 3 straight line relationships of annual equivalent cost and area in square feet. Define the type of construction recommended for each breakeven point. ( this is done by area)