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# H2A - ORIE 451/551 Homework#2 Due February 8 2008 1...

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ORIE 451/551 Homework #2 Due February 8, 2008 1. Consider the four mutually exclusive projects given below. Project Investment at Time Zero IRR A \$2,000 45% B \$2,500 40% C \$3,000 35% D \$3,500 30% The service life for all the four projects is the same and investment is required only at time zero. Also, IRR(B-A) = 17%, IRR(A-D) = 15%, IRR(D-C) = 10%, IRR(B-C) = 20%. Which project would you prefer at a MARR of 13%? Compare A to the DNA. Since IRR(A) > 13%, A wins and is the new defender. Compare B to A. Since IRR(B-A) > 13%, B wins and is the new defender. Compare C to B. Since IRR(C-B) = IRR(B-C) > 13%, C wins and is the new defender. Compare D to C. Since IRR(D-C) < 13%, D loses and C is the winner. Select C.

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2. Consider two mutually exclusive projects A and B. Assume that each project can be repeated indefinitely with the same cash flows. Find the salvage value(X) of project B that would make both the projects equivalent at a MARR of 10%. Procedure: Set the two EAC's of the projects equal. Salvage 314.22 Time A B 0 -600 -400 1 -200 -300 2 -200 14.22356 3 0 PW @ 10% (\$947.11) (\$660.97) EAC @ 10% \$380.85 \$380.85 Difference \$0.00 Answer: X = \$314.22.
3. A machine costs \$80,000 installed and \$6000 per year to operate.

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H2A - ORIE 451/551 Homework#2 Due February 8 2008 1...

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