ie2140-09-soln-07

# ie2140-09-soln-07 - IE 2140 Engineering Economy Solutions...

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IE2140 (2009) soln-7-1 IE 2140 Engineering Economy Solutions to Tutorial #7 1. (Modified Problem 11-5) ( a ) MARR = 18%. AW 1 (18%) = – 5,000 [ A / P , 18%, 8] + 1,800 – 400 + 800 [ A / F ,18%,8] = – 5,000 (0.245244 ) + 1,400 + 800 (0.065244) = \$ 225.97 AW 2 (18%) = – 6,500 [ A / P , 18%, 10] + 2,075 – 500 + 1,200 [ A / F , 18%, 10] = – 6,500 (0.222515) + 1,575 + 1,200 (0.042515) = \$ 179.67 Base case decision: Select Alternative 1 . To determine the capital investment of Alternative 2 ( I 2 ) so that the initial decision would be reverse, let AW 1 (18%) = AW 2 (18%) 225.97 = – I 2 (0.222515) + 1,575 + 1,200 (0.042515) I 2 = \$ 6,292 Hence the capital investment of Alternative 2 would have to be \$6,292 or lesser for the initial decision to be reversed. See Rainbow Diagram: (1,000) (800) (600) (400) (200) - 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 8000 8500 9000 9500 10000 Annual Worth (\$) Initial Investment for Alternative 2 Alternative 1 Alternative 2 Alternative 1 Alternative 2 Capital Investments (\$) 5,000 6,500 Annual revenues (\$) 1,800 2,075 Annual expenses (\$) 400 500 Estimated market value (\$) 800 1,200 Useful life (years) 8 10

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IE2140 (2009) soln-7-2 ( b ) Set AW 1 (18%) = AW 2 (18%) and solve for N . – 5,000 [ A / P , 18%, N 1 ] + 1,400 + 800 [ A / F , 18%, N 1 ] = 179.67 – 5,000 [ A / P , 18%, N 1 ] + \$1,220.33 + 800 [ A / F , 18%, N 1 ] = 0 By trial and error, or using Goal Seek in Excel, N 1 = 7.32 years. Rainbow diagram: -4,000 -3,500 -3,000 -2,500 -2,000 -1,500 -1,000 -500 0 500 1,000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Annual Worth (\$) Useful Life of Alternative 1 (years) Alternative 1 Alternative 2
IE2140 (2009) soln-7-3 2. (Problem 11.10) a . Building cost of motel = \$ 5 million Refurnishing cost = \$ 1,875,000 in years 0, 5 and 10. Annual operation & maintenance cost = \$125,000

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## This note was uploaded on 02/25/2011 for the course ECONS 2104 taught by Professor Prof during the Spring '08 term at National University of Singapore.

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ie2140-09-soln-07 - IE 2140 Engineering Economy Solutions...

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