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Unformatted text preview: Homework # 8 Solutions
Homework Assignment #8
IE 343: Engineering Economics
Instructor: A. Capponi Assigned: 29 Oct 2010
Due: 05 Nov 2010 Missing name on the top of each page submitted – 2
Not stapled together – 2
Not completed on the correct template – 10 Problem 1
A selection is to be made between two structural designs. Assume a study period of 25
years. The estimated market value of Alternative A at end of year 25 is $1,000. Assume
MARR = 15% per year.
Alternative A Alternative B
Useful life (years)
Salvage Value at end of useful life
Using the coterminated assumption with study period 25 years, determine which structure
is better by using equivalent worth methods. Please, state clearly your assumptions.
We first realize that the useful life of Alternative A is smaller than the study period of 25 years.
We repeat the costs of alternative A from year 10 to year 25, and then use the estimated market
value of $1,000 at the end of year 25. We then obtain the following cash flow diagram
5,000 1 1,000
1 10 25
12,000 12,000 We can now compare the two alternatives using the FW method. We have
( ) (
( ) ( ) (
( ) )
) Homework # 8 Solutions
Thus, A is more attractive than B.
A useful piece of depreciable property was bought for $20,000. If it has a useful life of 10
years and a salvage value of $5,000, how much will it be depreciated in the 9th year, using
the 150% declining balance schedule? R=1.5/10 = 0.15 (150% DB method)
B = $20,000
( ) ()
( : Annual depreciation deduction in year k (1 ≤ k ≤ N)
: Cumulative depreciation through year k ) : Book value at end of year k ( )( (
We have ) )
( ) )
) As the salvage value is $5,000, the property in year 9 can only be depreciated by an amount
. Problem 3
Textbook problem 7-2 (10 points) For a property to be considered depreciable, it must satisfy the following conditions:
a) It must be used in a business as a means of producing/generating income.
b) It must have a ‘determinable’ life, which is at a minimum of one year.
c) It should lose value through wear and tear, and through obsolescence etc. Homework # 8 Solutions
Textbook problem 7-6 (15 points) The cost basis for the furniture = 100,000 + 20,000 = $120,000
a) Using straight line method (depreciation is same for all years)
( ) b)
( c) ) Problem 5
Textbook problem 7-7 (15 points) a) The SL depreciation method is used.
( ) ( )
( ) b) ( ) () Homework # 8 Solutions
Textbook problem 7-8 (only a and b) (10 points) a) The SL method
( ) ( )
( ) b) The 200% DB method with switchover to SL. B = $60,000
( ) ( ) : Annual depreciation deduction in year k (1 ≤ k ≤ N) (
) Year, k
5 : Cumulative depreciation through year k
: Book value at end of year k
4,626.64 So no switchover to SL in 5 years. dk(SL)
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This note was uploaded on 09/19/2011 for the course IE 343 taught by Professor Vincent,g during the Spring '08 term at Purdue University-West Lafayette.
- Spring '08