Josaline, the owner of a construction company, is planning to purchase specialized equipment to complete a contract awarded to her company. The first cost of the equipment is $250,000 with a life of 3 years at which time she will no longer need the equipment. The operating cost is expected to be $75,000 per year. Alternatively, a subcontractor can perform the work for $175,000 per year. Because the equipment is specialized, Josaline is not sure about the salvage value. She estimates a likely salvage of $90,000, but it might have to be scrapped for as little as $10,000 in three years. The MARR is 15% per year.

a. Is her decision to buy the equipment sensitive to the salvage value?

b. Determine the salvage value at which the two alternatives break even.