Exam 2010, questions and answers - Engineering Economics PDF

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AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA 1. A fire truck will cost $150,000 in 5 years. If our MARR is 10%, how much must we deposit in the bank today so we can buy it in 5 years? Answer 93,135 Answer range +/-100 2. A firm charges its credit customers 1.75% a month. What is the effective interest rate (nearest integer percentage)? Answer 23 Answer range +/-0 3. A bank pays a nominal annual interest rate of 10%. What is the effective annual rate if it is compounded continuously (give percentage to 2 decimal places)? Answer 10.52 Answer range +/-0.02 Points 5 4. A program runs for 1 second for a variable n=10. When n is increased by 1, the running time increases by 18%. For n=50, what will be the running time (pick closest)? a. 40 b. 40*8 c. 2**10 5. A group of companies in the same industry get together and decide on a common price that has nothing to do with supply and demand. This is called a. insider trading b. scumbagging c. price-fixing

6.A loan with compound interest will result in a larger future sum, compared to the same loan with simple interest. ANSWER: True 7. A company deposits $2,000 in a bank account at the end of every year for 10 years. If the bank pays 8%, how much is the account worth at the end of 10 years? Use the tables. ANSWER: 28,974

8. A company deposits $2,000 in a bank account at the end of every year for 10 years. If the bank pays 8%, how much is the account worth at the end of 10 years? Use the tables. ANSWER: 42,562

9. A very well organized engineer wants to be a millionaire by her 60

th

birthday. She believes she can make 15% per annum on her th investments. She wants to deposit a fixed amount starting on her 20 birthday and continuing through her 59th. What is that fixed amount? ANSWER: 487

10. A student wants to have $30,000 when he graduates 4 years from now. His grandfather gave him a gift of $10,000. How much must he save each year (to the nearest dollar) if he deposits the $10,000 today and can earn 12% on both the $10,000 and his savings? ANSWER: 2984

11. A debt of $5,000 can be repaid, with interest of 8%, by the following schedule: (year1) $500; (year2) $1,000; (year3) $1,000; (year4) $2,000; (year5) $X. To the nearest $, what is X? ANSWER: 1,497

12. A set of cash flows begins at $50,000 and increases at 10% per annum for the next 15 years. If the interest rate is 7%, what is the present value of the set (to the nearest dollar)? ANSWER: 856,712

13. A daily interest account pays 6%, what is the (closest) effective interest rate? (ANS : 6.2%)

14. A Cost-benefit ratio of more than 1 meant that (ANS: The project will make a profit)

15. A junk bond is: a high-risk bond, one paying a high interest 16. A company wants to replace a machine in 15 years that will cost $10000. It does this by setting up a sinking fund of $320 per year. What is the closest IRR? 9.7% 17. A BCR indicating economic desirability has a value >1

18. A firm wants to get a price quote for an additional 100 units of a given product. You are asked to prepare a cost estimate. The number of hours to produce a unit is 4. The average labour rate is $10 an hour. The materials cost is $14 per unit. Overhead for additional 100 units is estimated at 40% of the direct labour cost. If the company wants to have a 35% profit margin, what should be the unit price to quote? Correct answer: c) 94.5 19. A new machine comes with 85 free service hours over the first year. Additional time costs $65 per hour. What are the average and marginal costs per hour for 65 hours? Your answer: a) Average: $0; Marginal: $0

20.A dealer will sell goods to his regular customers for $15 immediately or $18 if the payment is differed one week. What annual nominal interest rate is the dealer receiving? Your answer: a) 1040% 21.A company has borrowed $200,000 to purchase equipment. The loan carries an interest rate of 5% per year and is to be repaid in equal installments over the next 7 years. What is the amount of the annual installment?

Correct answer: a) $34,560

Feedback: A=200000(A/P, 5%, 7) A=200000(0.1728) A=34,560

22. A lottery prize pays $500 at the end of first year, $1,500 the second, $2,500 the third, and so on for 15 years. If there is only one prize in the lottery, 5,000 tickets are sold, and you could invest your money elsewhere at 10% interest, how much is each ticket worth, on average? Correct answer: d) $8.79 Feedback: P1=500(P/A, 10%, 15) P1=500(7.6061)

P1=3803.05 P2=1000(P/G, 10%, 15) P2=1000(40.1520) P2=40152 P=P1+P2 P=3803.05+40152=43955.05 Average price of each ticket=$43955.05/5000=$8.79 23. A country has a nominal GDP of $40,000,000, a total population of 1,000,000, a total employed labour force of 40,000, and a total real output of $70,000,000,000. Calculate the GDP per capita: (do not round your answer, your answer should be in dollars per person, with no commas). Answer Correct Answer:

70,000

Answer range +/- 0 (70000.0 - 70000.0)

24. A student borrows money from OSAP in order to pay their tuition fees. This is an example of equity financing. ANSWER: False 25. : A lender earns $22 in interest from lending $100. What is the lender's Rate of Return (ROR) as a percentages? (Example: enter 45 for 45%) ANSWER: 22

26. A lender wishes to loan $100 to a borrower. The load period is for exactly one year. The lender has the option of charging simple or compound interest. Which method of interest would generate the largest return? ANSWER: Compound Interest

27. A product whose supply and demand curves exhibit no change in demand as the price for the product's price changes can be described as perfectly elastic ANSWER: False

28. A new feed permits cattle to be raised at half the current costs. At the same time, researchers report that burgers act like Viagra. What will happen to the supply and demand curves of hamburgers? ANSWER: Demand curve shifts right, supply curve shifts right

29. A program inverts a 40x40 matrix in 1 second. For a 41x41 matrix, it takes 12% longer. Using the Rule-of-72 ONLY, calculate how long (in seconds) it will take to invert a 100x100 matrix. ANSWER: 1,024

30. A 6% coupon rate bond has a face value of $1,000, pays interest semi-annually and matures in 10 years. If the current market rate is 8%, compounded semi-annually, what is the bond’s value today? ANSWER: 864

31. A machine returns $80 at the end of each year, for 6 years. At the end of every 2 years (including year 6), you must spend $200

in cleaning the machine. What is its IRR (integer)?

ANSWER: $80(P/A,I,6) = $200(P/F,I,2) + $200(P/F,I,4) + $200(P/F,I,6) 0 = 200(1+i)^-2 + 200(1+i)^-4 + 200(1+i)^-6 – 80[(((1+i)^6)-1)/(i(1+i)^6)] Using MATLAB to plot, root found at i=50%

32. A machine has a first cost of $15,000. At the end of 4 years, it can be salvaged for $3,500. What is the depreciation schedule for Year 1 (that is what depreciation can you claim) using Straight Line (SL) to the nearest dollar? Cost – Benefit = $15,000-$3,500 = $11,500 over 4 years life $11,500/4 = $2,875 depreciation per year

33. A machine has a first cost of $15,000. At the end of 4 years, it can be salvaged for $3,500. What is the depreciation schedule for Year 1 (that is what depreciation can you claim) using Sum-Of-The-Years digits (SOYD)? Sum of Years Digits = 4 + 3 + 2 + 1 = 10 For year 1: 4/10 = 40% of depreciation value ($11,500) $11,500(0.4) = $4,600

34. A machine has a first cost of $15,000. At the end of 4 years, it can be salvaged for $3,500. What is the depreciation schedule for Year 1 (that is what depreciation can you claim) using DOuble-Declining Balance, (DDB) to the nearest dollar? DDB uses double straight line value ON B ONLY Straight line value is 25% per year DDB is 50% For year 1: $15,000(0.5) = $7,500 35. A machine has a first cost of $15,000. At the end of 4 years, it can be salvaged for $3,500. What is the depreciation schedule for

Year 1 (that is what depreciation can you claim) using CCA Class 43 (30%)? For CCA year 1; CCA1 = P(d/2) AGAIN B ONLY NOT B-S D = 30%, P = $15,000 CCA year 1 = $15,000(0.3/2) = $2,250 REMEMBER HALF-YEAR RULE

36. A machine that is been used for one year currently has a salvage value of $10,000 dollars, which will drop $2000 per year. Maintenance costs for the next four years are $1250, $1,450, $1,750 and $2,250. What is the marginal cost to extend service for the second year if the Marr is 8%? ANSWER: 4050 +/- 200 37. A pump's first cost is $45,000 at a Marr of 10%. The pump's end – of – year salvage values over the next five years are 42,000, 40,000, 38,000, 32,000, and 26,000. Determine the pump's economic service life to the nearest year. Answer: 3 38. A firm has 60,000 shares whose current price is $45.90. The shareholders expect a return of 14%. The firm has a three-year loan of $1,900,000 at 7.3%. It has issued 22,000 bonds with a face value of

$1000, 20 years left to maturity at a coupon rate of 7% and a current price of $925. Using market values for its debt and equity, what is the firm's before-taxes cost of capital? Express the answer as a percentage to one decimal digit. Eg 4.4 ANSWER: 7.8 MARKET VALUE OF STOCK = 45.9(60000) = 2,754,000 MARKET VALUE OF LOAN = 1,900,000 MARKET VALUE OF BONDS = 925(22000) = 20,350,000 BT COFC = (2.75M X 0.14 + 1.9M X 0.073 + 20.35M X 0.07) = 7.8%

39. A firm has 60,000 shares whose current price is $45.90. The shareholders expect a return of 14%. The firm has a three-year loan of $1,900,000 at 7.3%. It has issued 22,000 bonds with a face value of 40. $1000, 20 years left to maturity at a coupon rate of 7% and a current price of $925. Using market values for its debt and equity, what is the firm's before-taxes cost of capital? Express the answer as a percentage to one decimal digit. Eg 4.4 ANSWER: 7.8 MARKET VALUE OF STOCK = 45.9(60000) = 2,754,000 MARKET VALUE OF LOAN = 1,900,000 MARKET VALUE OF BONDS = 925(22000) = 20,350,000 BT COFC = (2.75M X 0.14 + 1.9M X 0.073 + 20.35M X 0.07) = 7.8%

41. A proposed bridge will cost $4 million to build and $180,000 per year in maintenance. The bridge should last 40 years. Benefits to the driving public are estimated to be $900,000 a year. Damage to adjacent property owners due to noise is estimated to be $250,000 per year. Because of the uncertainty about what interest rate should be used to evaluate the project, calculate the breakeven annual interest rate that results in a B/C ratio of one. Express the interest rate to one decimal (ie 4.4).

ANSWER: 11.6 42. A program inverts a 40x40 matrix in 1 second. For a 41x41 matrix, it takes 12% longer. Using the Rule-of-72 ONLY, calculate how long (in seconds) it will take to invert a 100x100 matrix. ANSWER: 1,024

43. A loan with compound interest will result in a larger future sum, compared to the same loan with simple interest. ANSWER: True

44. A company deposits $2,000 in a bank account at the end of every year for 10 years. If the bank pays 8%, how much is the account worth at the end of 10 years? Use the tables. ANSWER: 28,974

45. A company deposits $2,000 in a bank account at the end of every year for 10 years. If the bank pays 8%, how much is the account worth at the end of 10 years? Use the tables. ANSWER: 42,562

46. A very well organized engineer wants to be a millionaire by her 60th birthday. She believes she can make 15% per annum on her th investments. She wants to deposit a fixed amount starting on her 20 birthday and continuing through her 59th. What is that fixed amount? ANSWER: 487

47. A student wants to have $30,000 when he graduates 4 years from now. His grandfather gave him a gift of $10,000. How much must he save each year (to the nearest dollar) if he deposits the $10,000 today and can earn 12% on both the $10,000 and his savings? ANSWER: 2984

48. A debt of $5,000 can be repaid, with interest of 8%, by the following schedule: (year1) $500; (year2) $1,000; (year3) $1,000; (year4) $2,000; (year5) $X. To the nearest $, what is X? ANSWER: 1,497

49. A set of cash flows begins at $50,000 and increases at 10% per annum for the next 15 years. If the interest rate is 7%, what is the present value of the set (to the nearest dollar)? ANSWER: 856,712 50. A fire truck will cost $150,000 in 5 years. If our MARR is 10%, how much must we deposit in the bank today so we can buy it in 5 years? Answer 93,135 51. A firm charges its credit customers 1.75% a month. What is the effective interest rate (nearest integer percentage)? Answer 23 Answer range +/-0 52. A bank pays a nominal annual interest rate of 10%. What is the effective annual rate if it is compounded continuously (give percentage to 2 decimal places)?

Answer 10.52 Answer range +/53. A program runs for 1 second for a variable n=10. When n is increased by 1, the running time increases by 18%. For n=50, what will be the running time (pick closest)? a. 40 b. 40*8 c. 2**10 54. A group of companies in the same industry get together and decide on a common price that has nothing to do with supply and demand. This is called a. insider trading b. scumbagging c. price-fixing setting a price floor/ceiling 55. A junk bond is a) issued by a recycling company b) a high risk bond c) one paying a high interest d)

b and c

56. A company wants to replace a machine in 15 years that will cost $10,000. It does this by setting up a sinking fund of $320 per year. What is the closest IRR? a) 9% b) 9.5% c) 9.7% done through Interpolation 320=10,000 (A/F,I,15) 1000(A/F,9%,15) = 340.6 1000(A/F,10%,15) = 314.7 Interpolation a/b = c/d c= (a/b)*d a= 320 – 340.6 b= 314.7-340.6 c= i-9 d=10 – 9 =1

56. A program runs for 1 second for a variable n=10. When n is increased by 1, the running time increases 18%. For n=50, what will be the running time in seconds? a) 40 b) 40x18 c) 1024 d) 1018

57. A sludge plant to clean Bowmanville’s sewer lagoon cost $2M in 1999 and could handle a flow of 1 MGD. The city has expanded greatly as has its sewage. It must be replaced with a facility that can handle 10 MGD. If the cost index was 150 then and is 200 today and the CC exponent is 0.84, which expression represents the estimate of the cost of the new plant? 0.84 a. 2M(10/2) 0.84 b. 2M(10/2) (200/150) c. 0.84 2M(10/2)(200/150) d. 2M 0.84

(10.2)(200/150)

58. A medium ‐size consulting engineering firm is trying to decide whether it should replace its office furniture now or wait and do it 1 year from now. If it waits 1 year, the cost is expected to be $16,000. At an interest rate of 10% per year, what would be the equivalent cost now? Answer: Equivalent cost now: P + 0.1P = 16,000 1.1P = 16,000 P = $14,545.45 59. A machine has a first cost of $150,000. Its service life is 10 years when it can be sold for$30,000. Annual maintenance

costs are $2,500. At years 4 and 8, it will require major servicing at a cost of $20,000 each. What is the equivalent annual cost of owning and operating this machine, assuming a MARR of 10%?

[2] DRAW TIMELINE [2] C1 = -150 + 30(P/F,10%,10) = -150 +30(.3855) = -150+11.6 =138.4 [2] C2 = 2.5(P/A,10%,10) = 2.5(6.145) = 15.4 [2] C3 = 20[(P/F,10%,4)+ (P/F,10%,8) = 20(.6830+.4665) = 23.0 [2] ANS = (138.4+15.4+23)(A/P,10%,10) = 176.8(.1627) = 28.8 60. A break-even analysis is a. A form of sensitivity analysis b. The point where costs equal incomes c. The juncture of 2 money flow curves All of the above

61.A politico suggests that we should fix gas prices at 50 cents per litre. This would a. Lead to massive shortages b. Force governments to make up the tax shortfall by increasing general taxes c. Add to pollution d. All of the above 62.A benchmark barrel of oil is equivalent to about a. 42 Canadian gallons b. 42 litres c. d.

42 pounds 42 US gallons

63. A company wants to replace a machine in 15 years that will cost $10,000. It does this by setting up a sinking fund of $300 per year. What is the closest interest rate that will make this happen? a) 10% b) 10.5% c) 11.2% d) 11.6% 64.A BCR indicating economic desirability has a value a. 1 b. > 1 c. < 1 d. 0

65. A construction company has an option to purchase a certain bulldozer for $61,000 at any time between now and 4 years from now. If the company plans to purchase the bulldozer 4 years from now, the equivalent present amount that the company is paying for the dozer at 6% per year interest is closest to (Use given tables) a. $41,230 b. $46,710 c. $48,318 d. Over $49,000 Answer: c P = 61,000(P/F,6%,4) = 61,000(0.7921)

= $48,318

66. A manufacturer of toilet flush valves wants to have $2,800,000 available 10 years from now so that a new product line can be initiated. If the company plans to deposit money each year, starting 1 year from now, how much will it have to deposit each year at 6% per year interest in order to have the $2,800,000 available immediately after the last deposit is made? (Use given tables) a. Less than $182,000 b. $182,500 c. $191,300 d. Over $210,000 Answer: d A = 2,800,000(A/F,6%,10) A = $212,500 67. A company that manufactures hydrogen sulphide monitors is planning to make deposits such that each one is 5% larger than the preceding one. How large must the first deposit be (at the end of year 1) if the deposits extend through year 10 and the fourth deposit is $1250? Use an interest rate of 10% per year. a. $1312.50 b. $1190.48 c. $1133.79 d. $1079.80 Answer: d At t = 4  A1(1+g)3 = 1250 Size of first deposit A1 = 1250/(1 + 0.05)3 = $1079.80

68. A municipal bond that was issued 3 years ago has a face value of $5000 and a bond interest rate of 4% per year payable semi‐annually. The bond has a maturity date of 20 years from the date it was issued. If the interest rate in the marketplace is 8% per year, compounded quarterly, the value of n that must be used in the P/A equation to calculate the present worth of the bond is a. 34

69. A company that manufacturers control valves has a fund for equipment replacement that contains $500,000. If the company spends $75,000 per year on new equipment, how many years will it take before the fund is less than $75,000, at an assumed interest rate of 10%? P = 75000(P/A,10%,n) < 500000 or 500/75 = 6 years, 4 months so 7

70. A lender wishes to loan $100 to a borrower. The load period is for exactly one year. The lender has the option of charging simple or compound interest. Which method of interest would generate the largest return? ANS: Compound Interest 71. A lender earns $22 in interest from lending $100. What is the lender's Rate of Return (ROR) as a percentages? (Example: enter 45 for 45%)

72. A non-monetary increase in supply will lead to a) A decrease in the equilibrium price and an increase in the equilibrium quantity 22

73. A pump has failed and must be replaced. One option is to use a new brass pump at $6,000. However, the company has a used stainless steel one that could do the job and last as least as long as 3 years. Its initial cost was $13,000 and

the accountants value it now at $7,000. The engineer in charge says it could be used but would need a $500 coupling. Or he could sell it used for $4,000. What is the book value of the stainless steel pump? Answer as an integer such as: 2,000. 7000 ± 0

74. A pump has failed and must be replaced. One option is to use a new brass pump at $6,000. However, the company has a used stainless steel one that could do the job and last as least as long as 3 years. Its initial cost was $13,000 and the accountants value it now at $7,000. The engineer in charge says it could be used but would need a $500 coupling. Or he could sell it used for $4,000. What is its Opportunity cost of the stainless steel pump? 4000 ± 0 75. A program inverts a 40x40 matrix in 1 second. For a 41x41 matrix, it takes 24% longer. Using the Rule-of-72 ONLY, calculate how long...