IE343_HW7_Solutions

IE343_HW7_Solutions - HomeworkAssignment#7Solutions...

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Unformatted text preview: HomeworkAssignment#7Solutions  PU R D U E U N I V E RSI T Y I E 343 : E n gi n e e r i n g E con om i cs F a l l 2010 I nst r u c to r : A . C a p pon i Missing name on the top of each page submitted Not stapled together 2 Not completed on the correct template 10 H om e w o r k A ssign m e n t #7 A ssign e d : 15 O c t 2010 D u e : 22 O c t 2010 2 P r ob l e m 1 (15 points) S u ga r S p i c e , a coo k f a c to r y , n e e d s a n e w coo k i e c u t t e r m a c h i n e . T h e y h a v e n a r r ow e d t h e i r c h o i c es t o t h r e e d i f f e r e n t t y p es o f m a c h i n es, w h i c h a r e p r ese n t e d b e l o w A B C C ost $50,000 $22,000 $15,000 A n n u a l N e t I n com e $5,093 $2,077 $1,643 E a c h a l t e r n a t i v e h a s a u s e f u l l i f e o f 20 y e a r s w i t h n o s a l v a g e v a l u e . I f t h e M A R R i s 6 % , w h i c h a l t e r n a t i v e s h o u l d b e se l e c t e d , i f a n y ? We first need to determine which of the alternative is attractive. To this purpose, we compute the internal rate of return of each and compare it to MARR. We have -$50,000 + $5,093 (P|A, i, 20) = 0. Using Excel, i = 8% for Alternative A. -$22,000 + $2,077 (P|A, i, 20) = 0. Using Excel, i = 7% for Alternative B. -$15,000 + $1,643 (P|A, i, 20) = 0. Using Excel, i = 9% for Alternative C. Thus, all alternatives are attractive since they are all greater than 6%. As discussed in class, the IRR cannot be used to rank investment, but an incremental analysis is needed. We first rank alternatives based on the cost of the initial investment. This produces the ranking of C < B < A. The alternative C is the b ase alternative. We compare alternative C and B. The incremental investment leads to extra revenues The IRR of this incremental investment is the rate i such that As 2.14% < MARR, then alternative C remains the winner and the most attractive up to this point. IE343 HomeworkAssignment#7Solutions Page1  HomeworkAssignment#7Solutions  We next compare alternative C and A. The incremental investment leads to extra revenues The IRR of this incremental investment is the rate i such that As 7.56% > MARR, then the extra investment of $35,000 in alternative A is justified, as it leads to attractive incremental revenues, yielding a rate of return of 7.56%. Thus, the winner is A. C hoose a l t e r n a t i v e A . IE343 HomeworkAssignment#7Solutions Page2  HomeworkAssignment#7Solutions  P r ob l e m 2 (10 points) T e x t b oo k P r ob l e m 6-5 W h i c h m u t u a l l y e x c l u si v e d esign (i f a n y) sh ou l d b e c h ose n f r om t h e d esign s l i st e d h e r e? A 10-y e a r st u d y p e r iod is to b e u se d , a n d t h e M A R R is 10 % p e r y e a r . A l l m a r k e t v a l u es a r e n eg l i g i b l e . D es i g n A D es i g n B D es i g n C C a p i t a l i n v est m e n t $170,000 $330,000 $300,000 A n n u a l r e c e i p ts 114,000 147,000 130,000 A n n u a l e x p e n ses 70,000 79,000 64,000 U se t h e F W m e t h o d . C o n f i r m y o u r r e co m m e n d a t i o n , u s i n g t h e P W a n d A W m e t h o d s. USING FUTURE WORTH USING PRESENT WORTH USING ANNUAL WORTH T h e r e f o r e , a l l m e t hod s, F W , P W , a n d A W , c h oose D esign C IE343 HomeworkAssignment#7Solutions Page3  HomeworkAssignment#7Solutions  P r ob l e m 3 (15 points) T e x t b oo k P r ob l e m 6-18 A s t e m c e l l r es e a r c h p r o j e c t r e q u i r es e x p e n s i v e s p e c i a l i z e d l a b o r a t o r y e q u i p m e n t . F o r t h i s p u r p ose , t h r e e p i e c es of e q u i p m e n t a n d t h e i r assoc i a t e d c ash f low s (l ist e d b e low ) a r e u n d e r co n s i d e r a t i o n . O n e p i e c e o f e q u i p m e n t m u s t b e se l e c t e d , a n d t h e l a b o r a t 15 % p e r y e a r . E q u i p me n t EOY A B C 0 -$136,500 -$84,000 -$126,000 1 4 -$12,500 -$31,500 -$15,500 5 -$15,000 -$31,500 -$15,500 a . U se t h e P W m e t hod to r a n k -o r d e r t h e e con o m i c a t t r a c t i v e n ess of t h e t h r e e p r o j e c ts. So the r a n k -o r d e r is C > A > B . (C is the best one.) b . D e t e r m i n e t h e i n t e r es t r a t e a t w h i c h t h e l a b o r a to r y w o u l d b e i n d i f f e r e n t b e t w e e n E q u i p me n t B a n d E q u i p me n t C . This means that the PW or AW of Equipment B and Equipment C are equivalent. USING PRESENT WORTH  USING ANNUAL WORTH  Using Excel, we get, . If the MARR > 26.19%, select Equipment B. If the MARR < 26.19%, select Equipment C. IE343 HomeworkAssignment#7Solutions Page4  HomeworkAssignment#7Solutions  P r ob l e m 4 (15 points) T e x t b oo k P r ob l e m 6-24 T w o m u t u a l l y e x c l u s i v e h a r v es t i n g co m b i n es a r e b e i n g co n s i d e r e d f o r p u r c h a se b y a w h e a t f a r m e r . H e m u s t b u y a n e w c o m b i n e n o w . I n f o r m a t i o n r e l e v a n t t o h i s c o m p a r i so n o f t h e a l t e r n a t i v es is s u m m a r i z e d b e low . D ee r e FMC C a p i t a l i n v es t m e n t $240,000 $200,000 M a r k e t v a l u e a t e n d o f se r v i c e l i f e $80,000 $20,000 A n n u a l f u e l a n d m a i n t e n a n c e e x p e n ses $5,000 $10,000 Se r v i c e l i f e 12 y e a r s 12 y e a r s 12 % p e r y e a r . Based on the incremental analysis method, savings in annual expenses of $5,000 are achieved by investment cost of $40,000 and a loss of $60,000 of market value at the end of the service life. Therefore, select Deere as the basis for incremental IRR. The present worth of this incremental investment is given by    Using Excel, you can solve using IRR. This will result in i = 14.3%. S i n c e i = 14.3 % > 12 % . Therefore, the D e e r e op t ion is b e t t e r . Additional solution This can also be confirmed by simply computing the PW for both options, using the MARR = 12%.   IE343 HomeworkAssignment#7Solutions Page5  HomeworkAssignment#7Solutions  P r ob l e m 5 (15 points) T e x t b oo k P r ob l e m 6-28 C ons i d e r t h e f ol l ow i n g E O Y c ash f low s f o r t w o m u t u a l l y e x c l u si v e a l t e r n a t i v es (on e m u st b e c h ose n) : M achine X M achine Y C a p i t a l i n v es t m e n t $6,000 $14,000 A n n u a l e x p e n ses $2,500 $2,400 U se f u l l i f e 12 y e a r s 18 y e a r s M a r k e t v a l u e a t e n d o f u se f u l l i f e $0 $2,800 T h e M A R R is 5 % p e r y e a r . a . D e t e r m i n e w h i c h a l t e r n a t i v e s h o u l d b e s e l e c t e d i f t h e r e p e a t a b i l i t y a ss u m p t i o n a p p l i e s . USING ANNUAL WORTH Machine X Machine Y  USING PRESENT WORTH (with study period equal to list common multiple = 36) Machine X Machine Y  T h e r e f o r e , b ot h A W o r P W se l e c t A l t e r n a t i v e X . IE343 HomeworkAssignment#7Solutions Page6  HomeworkAssignment#7Solutions  b . D e t e r m i n e w h i c h a l t e r n a t i v e shou l d b e se l e c t e d i f t h e a n a l ysis p e r iod is 18 y e a r s, t h e r e p e a t a b i l i t y assu m p t io n d oes n ot a p p l y , a n d a m a c h i n e c a n b e l e ase d f o r $8,000 p e r y e a r a f t e r t h e u se f u l l i f e o f e i t h e r m a c h i n e i s o v e r . USING ANNUAL WORTH Machine X Machine Y  USING PRESENT WORTH Machine X  Machine Y  Or  F o r P W o r A W , s e l e c t A l t e r n a t i v e Y  IE343 HomeworkAssignment#7Solutions Page7  ...
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