Engineering Economics — Quiz 2

Questions in this quiz (10)

1. A maintenance agreement requires payments starting at $$2500$$ at the end of year $$1$$, increasing by $$400$$ each year for $$5$$ years, $$2500,2900,3300,3700,4100$$. If the interest rate is $$7%$$ annually, what is the present worth of these payments?

   • $$11842$$
   • $$13309$$
   • $$14210$$
   • $$16500$$

2. A university wants to establish an endowment that will provide $$20000$$ per year forever for research funding. If the fund earns $$4%$$ annual interest, how much must be invested today?

   • $$400,000$$
   • $$450,000$$
   • $$500,000$$
   • $$600,000$$

3. A project requires an initial investment of $$120000$$ and produces before-tax cash flows of $$40000$$ per year for $$6$$ years. The equipment is depreciated using straight-line depreciation over $$6$$ years with no salvage value. If the tax rate is $$30%$$, the after-tax internal rate of return is most nearly:

   • $$14%$$
   • $$16%$$
   • $$17.5%$$
   • $$19%$$

4. A public infrastructure project requires an initial investment of $$1500000$$ and annual maintenance costs of $$40000$$. The project provides annual benefits of $$150000$$ to users, $$70000$$ to local businesses, and $$30000$$ in environmental improvements. Using a $$20$$-year life and a discount rate of $$6\%$$, the benefit-cost ratio is most nearly:

   • $$1.28$$
   • $$1.46$$
   • $$1.53$$
   • $$1.67$$

5. A company can purchase equipment for $$90000$$ with a salvage value of $$12000$$ after $$6$$ years, depreciated using straight-line depreciation. Alternatively, the equipment can be leased for $$20000$$ per year. The company tax rate is $$25\%$$ and $$MARR$$ is $$9\%$$. The present worth of the after-tax lease cost is most nearly:

   • $$58,200$$
   • $$67,289$$
   • $$72,150$$
   • $$79,880$$

6. A firm is evaluating a new product. If demand is high with probability $$70\%$$, the profit will be $$250000$$. If demand is low with probability $$30%$$, the loss will be $$80000$$. What is the expected value of perfect information $$EVPI$$?

   • $$18,000$$
   • $$24,000$$
   • $$30,000$$
   • $$36,000$$

7. An investor requires a real rate of return of $$6%$$. If inflation is expected to be $$2.5%$$ annually, what is the minimum acceptable nominal rate of return?

   • $$8.50%$$
   • $$8.65%$$
   • $$8.75%$$
   • $$9.00%$$

8. Project $$A$$ requires an initial investment of $$60000$$ and generates $$18000$$ per year for $$6$$ years. Project $$B$$ requires an initial investment of $$40000$$ and generates $$13000$$ per year for $$6$$ years. Using a $$MARR$$ of $$9%$$, which project has the higher future worth and by how much?

   • Project $$A$$ by $$2140$$
   • Project $$A$$ by $$4075$$
   • Project $$B$$ by $$2140$$
   • Project $$B$$ by $$3680$$

9. A university wants to fund scholarships of $$40,000$$ in the first year, increasing at $$3%$$ annually forever. If the discount rate is $$7%$$, what is the required endowment amount?

   • $$800,000$$
   • $$1,000,000$$
   • $$1,333,333$$
   • $$2,000,000$$

10. A project has the following end-of-year cash flows: Year $$1=12000$$, Year $$2=18000$$, Year $$3=22000$$, Year $$4=28000$$, Year $$5=35000$$. Using a discount rate of $$10%$$, the present worth is most nearly:

    • $$72500$$
    • $$76890$$
    • $$81,171$$
    • $$85600$$