Homework Assignment #5 Solutions
IE 343 – Homework Assignment #5 Solutions – Page 1
PURDUE UNIVERSITY
Homework Assignment #5
IE 343: Engineering Economics
Assigned: 24 Sept 2010
Fall 2010
Due: 01 Oct 2010
Instructor: A. Capponi
Missing name on the top of each page submitted – 2
Not stapled together
– 2
Not completed on the correct template
– 10
Problem 1
(15 points)
Consider a machine that cost $15,000 and has a 5 year useful life. At the end of 5 years, it can be
sold for $3,500. The machine increases the profit for the firm by $4,000 per year.
(a)
Draw cash flow diagram
3,500
$4,000
$4,000
$4,000
$4,000
$4,000
0
1
2
3
4
5
$15,000
(b)
Should the machine be purchased if the MARR is 10% per year and the annual worth
method is used?
We have CR(0.1) = $15,000 (A/P, 0.1,5) - $3,500 (A/F, 0.1, 5) = $3,957-$573.3 =
$3,384. Thus, we get that the annual worth is
AW(0.1) = $4,000 - $3,384 = $616 > 0.
Since AW(0.1) >0, we can conclude that buying the machine is a worthwhile investment.