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Lecture 7 marked

Lecture 7 marked - ISE 460 Engineering Economy University...

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ISE 460: Engineering Economy University of Southern California Fall 2010 Joseph Chow Week 4: Lecture 7
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HW Schedule Summary HW #1, due 9/14/10 Lecture 1 1.3 1.4 Lecture 2 1.5 HW #2, due 9/16/10 Lecture 3 2.1 2.2 Lecture 4 2.3 2.4 Lecture 5 2.5 Lecture 6 2.6 10/12/10 2
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Review Last week – Discounted Cash Flows The Net Present Worth Minimum Rate of Return Today… More Present Worth Analysis Mutually Exclusive Alternatives Thursday Analysis Periods Sunk Costs, Opportunity Costs 10/12/10 3
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PRESENT WORTH VARIATIONS 10/12/10 4
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Present Worth Analysis Variations 10/12/10 5 Last lecture – We used present period as the common period How about comparing at a future period? Or how about if the useful life is perpetual?
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Future Worth Analysis 10/12/10 6 Useful when you need to compute worth of a project at the END of its investment period instead of the beginning (large capital projects – i.e. a nuclear power plant that takes 7-10 yrs to build – the FUTURE worth is suitable at the time of the project’s commercialization)
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Future Worth Example Stark Industries wants to take Tony’s robot servant JARVIS and mass produce it A mass production plant costs $10M, with $4M due to contractor at end of yr 1 and $6M at end of yr 2. Construction would complete by end of year 2. A 30- acre site costs $1.5M to purchase. Mfg equipment can be installed and paid for by end of yr 2 for $13M, including transportation and installation. At the end of project, the land has an after-tax market value of $2M, the building an after-tax value of $3M, and the equipment an after-tax value of $3M. Assume MARR = 15% and 6-year economic life. Determine equivalent worth of the investment at the start of operations . 10/12/10 7
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Future Worth Example Year 0 1 2 3 4 5 6 7 8 Operating Revenue $6M $8M $13M $18M $14M $8M Investment Land -$1.5M $2M Building -$4M -$6M $3M Equipment -$13M $3M Net Cash Flow -$1.5M -$4M -$19M $6M $8M $13M $18M $14M $16M 10/12/10 8 -$25.58M + $43.98M As an aside, someone built a “JARVIS” for $691.98: http://gizmodo.com/5511176/iron-man-
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Example: P5.16 10/12/10 9 Suppose you have $1,000 to invest over 5 yrs. The interest rate in the U.S. is 4% for invested Dollars. The interest rate in Europe is 5% for invested Euros. The interest rate in Japan is 6% for invested Yen. Assume that these interest rates are expected to remain unchanged over the next 5 yrs.
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Example: P5.16
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