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

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IE 343 Fall 2009 Name: _______________________ Student ID: ___________________ 1 IE 343 Midterm 2. Oct 26 th , 2009 Closed Book, Closed Notes Show all of your work . Your work and answers must be shown on the pages provided. Write your name and student ID in the spaces provided above. For problems 2 and 4, note that no interest tables are required; you are to carry your answer to the point where the equation for each problem is specified –e.g., “1,000(A/P, 10%, 5) + 1,500 + 200(A/F, 10%, 5)” and stop here. Your grade on this problem will be based on the correctness of the equation and the clarity of your work leading up to the equation. For problems 1, 3, 5 and 6 , interest tables may be used and provided for you to perform your calculations.
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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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