IOE+201+Homework+5+Solutions

IOE+201+Homework+5+Solutions - 1 000 25 15 1 000 15 15 1...

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1 IOE 201 - Economic Decision Making Homework #5 - Solutions 1. Payment against principal in k th month’s payment is 1 ) 1 ( + - + = k N k i A E Payment in interest in k th month’s payment is + - = + - 1 ) 1 ( 1 1 k N k i A I Number of monthly payments in 15-year loan is N = 15 × 12 = 180 For 21 st month ( k = 21), 160 1 21 180 21 ) 1 ( ) 1 ( i A i A E + = + = + - and + - = 160 21 ) 1 ( 1 1 i A I Interest payment is twice payment against principal: I 21 = 2 E 21 160 160 ) 1 ( 2 ) 1 ( 1 1 i A i A + = + - 1 ) 1 ( 3 160 = + i 00689 . 1 3 ) 1 ( 160 1 = = + i Interest rate i = 0.00689 per month = 0.00689 × 12 = 8.27% per year . 2. Cash flows: 0 1 2 3 $5,000 $40,000 $5,000 $5,000 $5,000 $20,000 $20,000 $20,000 $20,000 $10,000 4 Net cash flows : Year Net Cash Flows 0 - $40,000 1 $20,000 - S5,000 = $15,000 2 $20,000 - S5,000 = $15,000 3 $20,000 - S5,000 = $15,000 4 $20,000 - S5,000 + $10,000 = $25,000 New Present Worth ( NPW ) = $ + + + + + + + + - 4 3 2 ) 15 .
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Unformatted text preview: 1 ( 000 , 25 ) 15 . 1 ( 000 , 15 ) 15 . 1 ( 000 , 15 ) 15 . 1 ( 000 , 15 000 , 40 = $8,542.21 NPW > 0. Therefore, accept plan. 2 3. Annual Equivalent ( AE ) cost of purchasing the equipment is AE = -+ + 1 ) 1 ( ) 1 ( 000 , 25 $ N N i i i where i = MARR = 0.12 = -+ + 1 ) 12 . 1 ( ) 12 . 1 ( 12 . 000 , 25 $ 3 3 = $10,408.72 > rental costs of $10,000 per year. Rental is the better economic alternative. 4. For 10% per year Internal Rate of Return (IRR), Net Present Worth ( NPW ) = $ + + + + + +-3 2 ) 1 . 1 ( ) 1 . 1 ( 900 ) 1 . 1 ( 800 000 , 2 X = 0 X = (1 + 0.1) 3 $528.93 = $704...
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IOE+201+Homework+5+Solutions - 1 000 25 15 1 000 15 15 1...

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