Lec%2031_Full(1)

# Lec%2031_Full(1) - IE 343 Engineering Economics Lecture 31...

This preview shows pages 1–10. Sign up to view the full content.

IE 343 Engineering Economics Lecture 31: Chapter 8 – Price Changes and Exchange Rates Instructor: Tian Ni Nov.9, 2011 IE 343 Fall 2011 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
A high specialized piece of equipment has a first cost of \$50,000. If this equipment is purchased, it will be used to produce income (through rental) of \$20,000 per year for only four years. At the end of year four, the equipment will be sold for a negligible amount. Estimated annual expenses for upkeep are \$3,000 during each of the four years. The MACRS (GDS) recovery period for the equipment is seven years, and the firm’s effective income tax rate is 40%. IE 343 Fall 2011 Example 7.8 – Textbook Example 7-17 2
(a) If the after-tax MARR is 7% per year, should the equipment be purchased? (b) Rework the problem, assuming that the equipment is placed on standby status such that depreciation is taken over the full MACRS recovery period. IE 343 Fall 2011 Example 7.8 – Textbook Example 7-17 3

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
(a) If the after-tax MARR is 7% per year, should the equipment be purchased? Answer: because the equipment will only be used for 4 years and the GDS recovery period is 7 years, we need to apply the half-year convention to calculate the recovery rate: r1 = 0.1429, r2 = 0.2449, r3 = 0.1749, r4 = 0.1249/2 = 0.06245 by half year convention. IE 343 Fall 2011 Example 7.8 – Textbook Example 7-17 4
IE 343 Fall 2011 Example 7.8 – Textbook Example 7-17 5 EOY K BTCF rk dk TI Tk ATCF 0 -50,000 -50,000 1 17,000 0.1429 7,145 9,855 -3,942 13,058 2 17,000 0.2449 12,245 4,755 -1,902 15,098 3 17,000 0.1749 8,745 8,255 -3,302 13,698 4 17,000 0.0625 3,123 13,878 -5,551 11,449 4 0 -18,743 7,497 7,497 Please refer to Excel-Chapter7.xls for detailed calculation!

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
After-tax MARR = 7% PW(7%) of ATCF for 4 years study period = \$1,024 > 0 So the equipment should be purchased! IE 343 Fall 2011 Example 7.8 – Textbook Example 7-17 6
(b) Rework the problem, assuming that the equipment is placed on standby status such that depreciation is taken over the full MACRS recovery period. Answer: with full MACRS GDS recovery period 7 years, we know r1 = 0.1429, r2 = 0.2449, r3 = 0.1749, r4 = 0.1249, r5 = 0.0893, r6 = 0.0892, r7 = 0.0893, r8 = 0.0446 IE 343 Fall 2011 Example 7.8 – Textbook Example 7-17 7

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
IE 343 Fall 2011 Example 7.8 – Textbook Example 7-17 8 Please refer to Excel-Chapter7.xls for detailed calculation! EOY K BTCF rk dk TI Tk ATCF 0 -50,000 - -50,000 1 17,000 0.1429 7,145 9,855 -3,942 13,058 2 17,000 0.2449 12,245 4,755 -1,902 15,098 3 17,000 0.1749 8,745 8,255 -3,302 13,698 4 17,000 0.1249 6,245 10,755 -4,302 12,698 5 0 0.0893 4,465 -4,465 1,786 1,786 6 0 0.0892 4,460 -4,460 1,784 1,784 7 0 0.0893 4,465 -4,465 1,786 1,786 8 0 0.0446 2,230 -2,230 892 892 8 0 0 0 0
After-tax MARR = 7% PW(7%) of ATCF for full GDS 7 years recovery period = \$353 > 0 So the equipment should be purchased! But since \$353 < \$1,024, so we prefer to sell the

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## 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.

### Page1 / 43

Lec%2031_Full(1) - IE 343 Engineering Economics Lecture 31...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online