IE 343 Fall 2009
Name: _______________________
Student ID: ___________________
2
1.
A firm is considering investing in a machine that has an initial cost of $36,000.
For a period of 10 years, operating and maintenance costs are expected to be
$4,000 a year while estimated annual revenues are expected to be $16,000 a year.
In addition, the machine needs to be serviced at the end of year 6 at a cost of
$8,000. At the end of 10 years, the machine has a salvage value of $5,000. The
firm’s MARR is 10% a year.
a)
Determine the discounted payback period for this investment.
8
points
Therefore,
θ
’ = 4 years
b)
If
ε
= 5%, what is your recommendation for this project using the ERR
method?
10 points
PW of expenses = 36,000 + 8,000 (P/F, 5%, 6) + 4,000 (P/A, 5%, 10)
FW of revenues = 16,000 (F/A, 5%, 10) + 5,000
Thus, [36,000 + 8,000 (P/F, 5%, 6) + 4,000 (P/A, 5%, 10)] (F/P,
i
’, 10)
= 16,000 (F/A, 5%, 10) + 5,000
(1+
i
’)
10
= 2.831
Hence,
i
’
≈
11%
Since
i
’ > MARR, accept the project.
EOY