Engineering Economics — Quiz 5

Questions in this quiz (10)

1. A company is evaluating two investment alternatives. Alternative $$A$$ requires an investment of $$220000$$ and has potential revenues of $$480000$$ with probability $$0.60$$ or $$260000$$ with probability $$0.40$$. Alternative $$B$$ requires an investment of $$180000$$ and has potential revenues of $$360000$$ with probability $$0.55$$ or $$210000$$ with probability $$0.45$$. Based on expected profit, which alternative should be selected and what is its expected profit?

   • $$150400$$
   • $$132000$$
   • $$172000$$
   • $$133000$$

2. A firm must choose between two products. Under high demand with probability $$0.35$$, Product $$1$$ yields $$420000$$ and Product $$2$$ yields $$320000$$. Under low demand with probability $$0.65$$, Product $$1$$ yields $$140000$$ and Product $$2$$ yields $$250000$$. The expected value of perfect information is most nearly:

   • $$35000$$
   • $$49000$$
   • $$59000$$
   • $$69000$$

3. A project requires an initial investment of $$550000$$ and generates annual cash flows of $$135000$$ for $$8$$ years. Using a base discount rate of $$7\%$$, the NPV is $$105000$$. If a risk premium of $$2\%$$ is added to account for project uncertainty, the risk-adjusted NPV is most nearly:

   • $$62000$$
   • $$71000$$
   • $$82000$$
   • $$197090$$

4. Equipment has the following annual cost scenarios: normal operation costs $$22000$$ with probability $$0.65$$, minor failure requires $$60000$$ repair with probability $$0.20$$, and major failure requires $$130000$$ repair with probability $$0.15$$. The expected annual cost is most nearly:

   • $$36300$$
   • $$41300$$
   • $$46300$$
   • $$45800$$

5. A machine costs $$280000$$ and has a salvage value of $$40000$$ at the end of its $$12$$-year useful life. Using straight-line depreciation, the book value at the end of year $$5$$ is most nearly:

   • $$180000$$
   • $$200000$$
   • $$240000$$
   • $$220000$$

6. Equipment costing $$150000$$ has a salvage value of $$18000$$ and a useful life of $$6$$ years. Using the double declining balance method, the depreciation in year $$2$$ is most nearly: Solution: For the double declining balance method, the depreciation rate is: $$\frac{2}{6}=\frac{1}{3}$$ Year $$1$$ depreciation is: $$150000\left(\frac{1}{3}\right)=50000$$ Book value at the end of year $$1$$ is: $$150000-50000=100000$$ Year $$2$$ depreciation is: $$100000\left(\frac{1}{3}\right)=33333.33$$ Most nearly: $$33333$$ Final answer: $$33333$$

   • $$24000$$
   • $$25000$$
   • $$33333$$
   • $$41667$$

7. An asset costs $$120000$$, has a salvage value of $$12000$$, and a useful life of $$8$$ years. Using the sum of years digits method, the depreciation in year $$1$$ is most nearly:

   • $$18000$$
   • $$20000$$
   • $$24000$$ $$26000$$
   • $$26000$$

8. A company purchases equipment for $$180000$$ that qualifies as $$5$$ year MACRS property. The MACRS depreciation rates are Year $$1$$ = $$20\%$$, Year $$2$$ = $$32\%$$, Year $$3$$ = $$19.2\%$$, Year $$4$$ = $$11.52\%$$, Year $$5$$ = $$11.52\%$$, Year $$6$$ = $$5.76\%$$. The depreciation expense in year $$2$$ is most nearly:

   • $$34560$$
   • $$36000$$
   • $$39600$$ $$41200$$
   • $$41200$$

9. A piece of equipment costs $$260000$$ and has an estimated salvage value of $$30000$$. The equipment is expected to produce $$600000$$ units over its useful life. If $$90000$$ units are produced in year $$1$$, the depreciation for year $$1$$ using the units of production method is most nearly:

   • $$30500$$
   • $$34500$$
   • $$36500$$
   • $$38500$$

10. An investment offers a nominal interest rate of $$9\%$$ per year. If the inflation rate is $$2.5\%$$ per year, the real interest rate is most nearly:

    • $$6.1\%$$
    • $$6.3\%$$
    • $$6.5\%$$
    • $$6.8\%$$