IE343_HW11_Solutions

IE343_HW11_Solutions - Homework#11Solutions PU R D U...

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Unformatted text preview: Homework#11Solutions 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 H om e w o r k A ssign m e n t #11 A ssign e d : 29 N ov 2010 D u e : 5 D e c 2010 P r ob l e m 1 (10 points) T h e a u to of you r d r e a ms costs $20,000 tod a y . Y ou h a v e f ou n d a w a y to e a r n 15 % t a x f r e e on a n a u to p u r c h ase a c cou n t . I f you e x p e c t t h e cost of you r d r e a m a u to to i n c r e ase b y 10 % f o r t h e p u r c h a se of t h e a u t o 5 y e a r s f r o m n o w ? A NS: 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#11Solutions P r ob l e m 2 (10 points) A f i r m i s h a v i n g a l a r ge p i e c e o f e q u i p m e n t o v e r h a u l e d . I t e x p e c t s t h a t t h e m a c h i n e w i l l b e n e e d e d f o r t h e n e x t 12 y e a r s. T h e f i r m h as a n 8 % M A R R . T h e con t r a c to r h as su ggest e d t h r e e a l t e r n a t i v es : A . A co m p l e t e ov e r h a u l f o r $6,000 t h a t sh ou l d p e r m i t 12 y e a r s of op e r a t io n B . A m a j o r ov e r h a u l f o r $4,500 t h a t c a n b e e x p e c t e d to p r ov i d e 8 y e a r s of se r v i c e . A t t h e e n d o f 8 y e a r s, a m i n o r o v e r h a u l w o u l d b e n e e d e d . C . A m i n o r o v e r h a u l n o w . A t t h e e n d o f 4 a n d 8 y e a r s, a d d i t i o n a l m i n o r o v e r h a u l s wou l d b e n e e d e d . I f m i n o r ov e r h a u ls cost $2,500, w h i c h a l t e r n a t i v e sh ou l d t h e f i r m se l e c t ? I f m i n o r ov e r h a u ls, w h i c h n ow cost $2,500, i n c r e ase i n cost a t 5 % p e r y e a r , b u t ot h e r costs r e m a i n u n c h a n ge d , w h i c h a l t e r n a t i v e s h o u l d t h e f i r m s e l e c t ? A NS: (1) Under the assumption that the minor 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#11Solutions Therefore, when we account for a 5% inflation in the overhaul cost, we should choose alternative A. P r ob l e m 3 T e x t b oo k p r ob l e m 8-24 (10 points) A NS: 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. P r ob l e m 4 T e x t b oo k p r ob l e m 8-31 A NS: (10 points) Homework#11Solutions P r ob l e m 5 T e x t b oo k p r ob l e m 8.51 (20 points) A NS: 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#11Solutions 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#11Solutions     ...
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