# hw4 - estimate of the salvage value for alternative 1 have...

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CE 167: Engineering Project Management HO15 1 Unequal Lives, Sensitivity, and IRR Assignment 4 HO: Thursday February 14, 2008 DUE: Thursday February 21, 2008 1. Comparison of Alternatives Drilling equipment needs to be purchased. The initial cost of the unit of Type A is \$50,000 and this unit has a life of 10 years. After 5 years of use, the drill bit needs to be replaced for \$10,000. The life of the unit of Type B is 15 years, and no replacement of bits is required. If the MARR is 10%, at what initial cost does equipment of Type B become an economically viable alternative? 2. Sensitivity Analysis: Consider the following two alternatives: Alternative 1 Alternative 2 First cost \$20,000 \$16,000 Annual Expense \$5,000 \$3,000 Annual Income \$11,500 \$11,500 Salvage Value \$4,000 \$0 Life 8 years 4 years Suppose that the salvage value of alternative 2 is known with certainty. By how much would the
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Unformatted text preview: estimate of the salvage value for alternative 1 have to vary so that the initial decision based on the data above would be reversed? The minimum acceptable rate of return is 10%. HINT: Note that alternatives 1 and 2 have different lives. 3. The HVAC engineer for a company constructing one of the world’s largest buildings has requested that \$500,000 be spent now during construction on software and hardware to improve the efficiency of the environmental control systems. This is expected to save \$10,000 per year for 10 years in energy costs and \$700,000 at the end of 10 years in equipment refurbishing costs. The owner has a MARR of 5%. 3.1 Calculate the IRR of this investment. 3.2 Is this investment justified and why? 4. In your own words, define the term ‘internal rate of return.’ 5. In your own words, define the term ‘inflation.’...
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