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# Lec%2026_Full - IE 343 Engineering Economics Lecture 26:...

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IE 343 Engineering Economics Lecture 26: Chapter 7 - Depreciation and Income Taxes Instructor: Tian Ni Oct.28, 2011 IE 343 Fall 2011 1

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Study Period = Useful Lives Equivalent Worth Method: PW, AW, FW, select the alternative which maximizes the EW Rate of Return Method (Incremental Analysis): order the alternatives from lowest capital investment to largest. Select the base alternative ( Cost Alternative : Alternative with lowest capital investment; Investment Alternative : the first acceptable alternative with lowest capital investment). Use rate of return method to justify the incremental analysis. (you can use EW method to justify the incremental analysis as well) IE 343 Fall 2011 Chapter 6: Summary 2
Study Period ≠ Useful Lives Case 1: Repeatability Assumption holds. Simply compare the AW amounts of each alternative over its own useful life and select the alternative that maximizes AW. Or use EW method with study period = least common multiple of all the alternatives IE 343 Fall 2011 Chapter 6: Summary A A A B B 0 4 6 8 12 3

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Study Period ≠ Useful Lives Case 2: Study period > Useful life. Coterminated Assumptions: when useful life is less than the study period, all the cash flows will be reinvested at MARR until the end of the study period. Use EW method to select the best alternative among all the alternatives IE 343 Fall 2011 Chapter 6: Summary A B 0 4 6 12 Study Period > Useful life of A 4
Study Period ≠ Useful Lives Case 3: Study period < Useful life. imputed(implied) market value technique: compute the imputed market value MV T at the end of the study period T, and use the EW method to select the best alternative MV T = PW T (MARR) CR + PW T (MARR) S =[ I (A/P, i %, U )- S (A/F, i %, U )](P/A, i %, U-T )+ S (P/F, i %, U-T ) IE 343 Fall 2011 Chapter 6: Summary A B 0 4 6 12 Study Period < Useful life of B 5

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Bond Market IE 343 Fall 2011 6
IE 343 Fall 2011 Bond Market Definition: A bond is a promise to make periodic coupon payments and to repay principal at maturity Breach of this promise is an event of default and the issuer may be forced to wind up Fixed Bond: make equal coupon payments periodically Floating Bond: coupon payments vary 7

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IE 343 Fall 2011 Bond Market Bonds are thus debt securities of original maturities of longer than one year, i.e. capital market instruments, or even perpetual bonds Issuers are corporations and governments It is largely an institutional market 8
IE 343 Fall 2011 Bond Valuation Notations: P: Face value or par value (Usually normalized to \$100 per share) r: Coupon rate C: Coupon value (Usually C = Pr=100r) N: number of periods or life of the bond i: bond yield rate (effective interest rate) V: Value of the bond or price of the bond 9

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Bond Valuation The cash flow diagram of a Fixed Bond : Price of the bond or value of the bond is: V = C(P/A, i%, N) + P(P/F, i%, N) Or V = Pr(P/A, i%, N) + P(P/F, i%, N) 0 V = ?? C
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## This note was uploaded on 01/28/2012 for the course IE 343 taught by Professor Vincent,g during the Winter '08 term at Purdue University-West Lafayette.

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Lec%2026_Full - IE 343 Engineering Economics Lecture 26:...

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