Assignment: Advanced Engineering Economics

1 The interest rate is 4%. You are offered either $1,000 now or $1,081.60 in two years. Which do you prefer ?

(A) $1,000 now
(B) $1,081.60 in two years
(C) They are worth the same so I will take either one
(D) I don't have enough information to decide

2 The interest rate is 4%. How much is $1,000 worth in 6 years?

(A) $1,000
(B) $1,081.60
(C) $1,216.65
(D) $1,265.32

3 You borrow $5,000 at 5%. How much is the balance on your loan at the end of year 2 if you pay $1,410.06 per year ?

(A) $5,000
(B) $2,621.88
(C) $1,265.61
(D) $0

4 What annual payment is required to pay off a loan of $5,000 at 5% in 4 years ?

(A) $1,250.00
(B) $1,410.06
(C) $1,650.56
(D) There is not enough information for me to give an answer

5 For problem 4 above, what is the balance at the end of year 4?

(A) $5,000.00
(B) $3,839.94
(C) $2,621.88
(D) $0

6 You are considering investing in a company that makes cell phones. It will take three years for the business to sell its first product. You can expect to make $600k in years 3, 4, 5 and 6. Your return on alternative investments is 6%. How much can you afford to invest ?

(A) $2.4 million
(B) $1.85 million
(C) $1.75 million
(D) You should not buy the business at any price

7 You loan $2,000 to a friend. How would you calculate the annual payments you should receive in each of the next 6 years if the interest rate is 6% ? There are two correct answers.

(A) $2,000(FV/PV, 6%,6)(A/FV, 6%, 6)
(B) $2,000(A/PV, 6%,6)
(C) $2,000(PV/A, 6%,6)
(D) $2,000(FV/PV, 6%,6)
(E) $2000(FV/PV, 6%, 6)(A/PV, 6%, 6)

8 What is the best decision criteria?

(A) NPV
(B) PI
(C) IRR
(D) Discounted PI
(E) Flip a coin

9 You are given a choice between Plan 1: $2,000 a year from now and $1,000 in two years OR Plan 2: $1,000 a year from now and $2,000 in two years. The interest rate is the same in both plans. Which has the higher PV ?

(A) Plan 1
(B) Plan 2
(C) Plans 1 and 2 are equivalent
(D) It depends on the interest rate

10 The IRR of a project is 10%. What is the project's NPV if alternative investments have a 10% return?

(A) 10%
(B) At least $1,000
(C) A negative number
(D) Zero

11 A project has an NPV of $1,250 at 10%. If you were to calculate the projects IRR, you should get a number bigger than 10% ?

True False

12 A project has an NPV of $1,250 at 10%. If you were to calculate the Project's PI, will you get a number bigger than 1 ?

Yes No

13 Calculate the after tax cash flow if you know the revenues for a business are $2.5 million, operating costs of $1.5 million, a marginal tax rate of 45% and depreciation of $1 million?

(A) $500k
(B) $750k
(C) $1 million
(D) $1.25 million

14 For the information in problem 13. If the revenue for the business increase and everything else stays the same, you would expect the after tax cash flow to:

(A) Increase
(B) Decrease

15 For the information in problem 14. If the operating costs go up for the business increase and everything else stays the same, you would expect the after tax cash flow to:

(A) Increase
(B) Decrease

16 For the information in problem 14. If the marginal tax rate increases and everything else stays the same, you would expect the after tax cash flow to:

(A) Increase
(B) Decrease

17 A project has an investment of $10,000. It returns $250 in each of the next40 years ! You are to do an IRR calculation. As you know the calculation involves trial and error. Is a good first guess at the IRR given by IRR = $250/$10,000 = 2.5%?

Yes No

18 A project has an investment of $1000 and returns of $300 in each of years 1, 2, 3 and 4. A reasonable estimate of the IRR is (Hint: Use the tables in the back of the book):

(A) Between 4 and 5 %
(B) Between 5 and 6%
(C) Between 6 and 7 %
(D) Between 7 and 8 %
(E) Between 8 and 9 %.