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Exam_2

# Exam_2 - IE 343 Fall 2009 Name Student ID IE 343 Midterm 2...

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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.
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