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Unformatted text preview: Homework #11 Solutions
PURDUE UNIVERSITY
IE 343: Engineering Economics
Fall 2010
Instructor: A. Capponi Homework Assignment #11
Assigned: 29 Nov 2010
Due: 5 Dec 2010 Problem 1
(10 points)
The auto of your dreams costs $20,000 today. You have found a way to earn 15% tax free
on an auto purchase account. If you expect the cost of your dream auto to increase by 10%
per year, how much would you need to deposit in the “auto purchase account” to provide
for the purchase of the auto 5 years from now?
ANS:
The inflation rate is f = 10%.
The market rate is im = 15%.
The cost of auto 5 years from now is:
(
) ( ) The amount to deposit now to have $32,210 five years from now is
(
)
(
) Homework #11 Solutions
Problem 2
(10 points)
A firm is having a large piece of equipment overhauled. It expects that the machine will be
needed for the next 12 years. The firm has an 8% MARR. The contractor has suggested
three alternatives:
A. A complete overhaul for $6,000 that should permit 12 years of operation
B. A major overhaul for $4,500 that can be expected to provide 8 years of service. At
the end of 8 years, a minor overhaul would be needed.
C. A minor overhaul now. At the end of 4 and 8 years, additional minor overhauls
would be needed.
If minor overhauls cost $2,500, which alternative should the firm select? If minor
overhauls, which now cost $2,500, increase in cost at 5% per year, but other costs remain
unchanged, which alternative should the firm select?
ANS:
(1) Under the assumption that the minor overhauls cost $2,500 which won’t be changed in
the future.
PW of alternative A will be If the minor overhauls cost $2,500, PW of alternative B will be
( ) . PW of alternative C is
( ) ( ) So we choose alternative C, which costs less than the others.
(2) Under the assumption that the minor overhauls cost $2,500 but the cost increases 5% per
year. ( )(  ) ( )(  ) ( )(  ) Homework #11 Solutions
Therefore, when we account for a 5% inflation in the overhaul cost, we should choose
alternative A. Problem 3
Textbook problem 824 (10 points) ANS:
If you expect the cost of firstclass postage will rise by 5% per year just like the past 30
years, then it is not worth it to invest if you have a personal MARR of 10%. Purchasing the
stamps would be like investing your money at a 5% interest when you would prefer to have
your money invested at a 10% interest. Problem 4
Textbook problem 831
ANS: (10 points) Homework #11 Solutions
Problem 5
Textbook problem 8.51 (20 points) ANS:
Capital investment I =  $260,000
Market value at end of 10th year = $50,000
Annual expenses = $ 6,000
Annual property tax = 4% of capital investment (no inflation)
Assume replacement takes place at end of year 10
Analysis time period = 20 years
Useful Life = 10 years
MACRS(GDS) – 5 year property class
Inflation rate: f = 4.5% per year
After tax interest: im = 12%
Tax rate: t = 40%
Increase rate = 6% per year (applied to annual expenses, replacement costs, and market
value).
b=0
As taxes are applied on the actual dollar amount, then annual expenses in year k have to be
computed in actual dollars. We have
Annual Expensek in actual dollars = Annual Expensek in real dollars (F/P, f, k).
Property Taxesk in actual dollars = t * I =  40% * $260,000 = $10,400
We have the following table Homework #11 Solutions Notice that the analysis has to be done in real dollars, therefore before computing the PW we
need to convert from actual to real dollars. Homework #11 Solutions
( ) ( ∑ ∑ ( ( )(  )( ) )(  ) ( )(  )(  ) )
)(  ∑ ( ∑ (
) ) ( )
(
)(  )
) ( ...
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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 UniversityWest Lafayette.
 Spring '08
 Vincent,G

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