IE343_HW11_Solutions - Homework #11 Solutions PURDUE...

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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 8-24 (10 points) ANS: If you expect the cost of first-class 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 8-31 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 University-West Lafayette.

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