IE4503

ENGINEERING ECONOMICS

Assignment #5
Instructions:
Due date: 21.05.2014 at 10:00 am
_ Solutions should be written on single-sided A4 or 8 x 11 inch white good quality paper. Pages
must be numbered in sequence.
_ Students’ names and numbers should be typed on the top of the first page.
_ Assignments should be solved by maximum 3 people.
_ All pages should be attached together.
Note: The assignments which are copied by each other will be evaluated with grade 0.

1. (35 points) An injection molding machine can be purchased and installed for $90,000. It
is expected to be kept in service for eight years. It is believed that $10,000 can be
obtained when the machine is disposed of the at the end of year eight. The net annual
value added that can be attributed to this machine is constant over eight years and
amounts to $15,000. An effective income tax-rate of 40% is used by the company, and the
before-tax MARR equals 25% per year. Use 150% Declining Balance depreciation
method is

a) (5 points) Determine the depreciation amounts in year one through eight?

b) (10 points) Set up a table and calculate the ATCF for this machine.

c) (10 points) Draw and compare the BTCF and ATCF cash flow diagrams.

d) (10 points) Using IRR method, determine if the machine is purchased.

2. (20 points) Your company is considering the introduction of a new product line. The
initial investment required for this project is $500,000, and annual maintenance costs are
anticipated to be $35,000. Annual operating cost will be directly in proportion to the level of
production at $7.50 per unit, and each unit of product can be sold for $50.00. If the project
has a life of five years, what is the minimum annual production level for which this project is
economically viable? Work this problem on an after tax basis. Assume five-year SL
depreciation (SV5 = 0), and effective income tax rate of 40%, and an after-tax MARR of 10%
per year.
3. (20 points) A hospital has two different medical devices it can purchase to perform a
specific task. Both devices will perform an accurate analysis. Device A costs $100,000
initially ,whereas device B (the deluxe model) costs $150,000. It has been estimated that
the cost of maintanance will be $5,000 for device A and $3,000 for device B in the first
year. Management expects these costs to increase 10% per year. The hospital uses a six
year study period , and its effective income tax rate is 50% . Both devices qualify as 5-
year 200%DB property . Which device should the hospital choose if the after- tax ,
MARR in base year is 8% per year ?

4. (25 points) XYZ rapid prototyping (RP) software costs $20,000, lasts one year ,and will
be expensed (i.e., written off in one year) . The cost of the upgrades will increase 10 %
per year , starting at the beginning of year two. How much can be spent now for an RP
software upgrade agreement that lasts three years and must be depreciated with SL
method to zero over three years ? MARR is 20 % per year (im) and the effective income
tax rate (t) is 34%.