Texas Southern University

ENGT 331 - ENGINEERING ECONOMY

Test No. 2 Review Questions 5,i- 1
9,7s

64,316 per year?

1001. $178,950 B. $96,061 annually, how
With interest at 8% compounded C.much
$175,134
money is requiredD.today
$171,887
to provide a perpetual incom e of

A remotely situated fuel cell has an installed cost of $2000 and will reduce existing surveillance expenses by $350 per
year for eight years. The border security agency's MARA is 10% per year. What is the minimum salvage (lin ar
value after eight years that makes the fuel cell worth purchasing?
A. $2000 B. $800 C. $350 3$285

3. Assume you are told that by investing $100,000 now, you will receive $10,000 per year starting in year 5 and
continuing forever. If you accept the offer, the rate of return on the investment is:
A. Less than 10% per year B. 0% per year C. 10% per year D. Over 10% per year
Given I = $-100,000; A = $-24,000; N = 6 years; and interest rate of 8% per year; the correct equation to calculate the
capitalized cost of a project with those estimates is:

A. -100,000 - 24.000(P/A, 8%, 6)] x (0.08) B. -100,000 - [24,000(P/A, 8%, 6)] (0.08)
C. -100,000 - [24,000(P/A, 8%, 6)] x (0.08) D. [-100,000(A/P, 8%, 6) - 24,000] 4- (0.08)

The following five alternatives are being evaluated by the rate of return method.
Incremental Rate of Return, %
Initial Rate of Return When compared to Alternative
Alternative Investrnent,$ for Alternative (%) A
A -25,000 9.6 28.9 19.7 36.7 25.5
B -35,000 1.5 38.9 14.7
15.1
C -40,000 13.4 - 49.4 28.0
-60,000 24.4 -0.6
-75000 20.2

05. If the alternatives are mutually exclusive and the MARR is 15% per year, which alternatives are
not feasible?
a. Only A b. Both D and E c. Both A and C d. Only D e. None

06. With an MARR of 15% per year, which alternative should be selected?
a. D and E b. Only B c. Only D d. Only A e. None

07. If alternatives A through E were independent projects, the MARR is 15% per year, and a budget constraint of
$160,000 is in effect, which projects should be selected?

a. A, B, C, and D
d. B and D only
b. A, D, and E c. B, C, and D only
e. D and E only

OS. The perpetual annual worth of investing $50,000 now and $20,000 per year starting in year 16 and continuing
forever at 12% per year is closest to:
A. $4200 B. $8650 $9655 D. $10,655

09. If you invest $5.123 in a venture now, and will receive $1,110 per year for the next 20 years: assuming 10%
101 interest, what is the discounted payback period for your investment?
A. 9 years B. 8 years C. 7 years a 6 years E. 5 years,

ENGT 331 FINALS - SPRING 2009 - page 1

 Q- An interest of 2% per month is the same as:
A. a nominal 24% per year, compounded monthly B. 24% per year
C. an effective 24% per year, compounded monthly D. both A and B
11. An interest rate of 15% per year. compounded monthly, is nearest to:
A. 1% per month B. 15.12% per year C. 16.08% per year D. 16.92% per year

12. An environmental testing company needs to purchase $40,000 worth of equipment 2 years from now. At an
interest rate of 20% per year, compounded quarterly, the present worth of the equipment is closest
to: A. $27,070 B. $27,800 C. $26,450 D. $28,220

13. A steel fabrication company invested $800,000 in a new shearing unit. At an annual interest rate of 12%,
compounded monthly, the monthly income required to recover the investment in 3 years is approximately: A.
$221,930 B. $31.240 C. $29,160 D. $26,570

14. The cost of replacing part of an automotive brake pad production line in 6 years is estimated to be $500,000. At
an interest rate of 18% per year, compounded semi-annually, the uniform amount that must be deposited into a sinking
fund every 6 months is closest to: A.
$21,335 B. $24,825 C. $28,615 D. $97,995

15-19. The following cash flow estimates have

been developed for two small, mutually exclusive investment alternatives. The minimum attractive rate
of return is 12% per year.

0 1 3 4 5
-$2.500 750 750 750 750 2,750

-$4,000 1.200 1.200 1,200 1,200 3,200

MI5. What is the present worth of alternative 1?

A. $1338 B. -$584 C. $487 D. $371E. $1,590
At which of the following IRR. values on incremental investment would alternative 1 be a better choice?
A. 12% B. 15% C. 10% D. 28% E. 25%

16. At which of the following IRR values on incremental investment would alternative 2 be a better choice?
A. 18% B. 10% C. 12% D. 5% E. 8%

If the individual IRR values for alternatives 1 and 2 are 18% and 28% respectively, which alternative should be

selected?
A. alternative 1 B. alternative 2 C. Can=t tell from this information D. Both

17. Based on the information provided which alternative, 1 or 2, should be selected?

A. alternative 1 B. alternative 2 C. Neither D. Both 1 and 2

18. If compounding is monthly, find the nominal interest rate that will make a $43,000 single payment at the end of
4 years equivalent to a $2,000 quarterly payment over 4 years.
A. 16.08% B. 16.40% C. 15.00% D. 15.50%

EN'GT 331 Test 2 Fall 2009 Page 2

 21. An investment of 550.000 resulted in unitbrrn income of $10.000 per year for 10 years and a single a m ount of
$5000 in year 5. The rule of return on the investment was closest to:
A. r MO% per yr B. 14.2% per yr C. 16.4% per yr a 113.6% per y r

A $10,000 municipal bond due in 10 yrs pays interest of $400 per yr. If an investor purchases the bond now for
$9000 and holds it to maturity, the rate of return received by the investor will be closest to:
A. 6.9% 5.3% C. 4.2% D. 3.5%

23. What is the present equivalent value of $10,000 received 10 years from now at 16% compounded quarterly?
A. $2,267 B. $2,083 C. $2,320 D. $2,125

24. If compounding is semiannual, find the effective annual interest rate that will make a present single payment of
$5,000 equivalent to semiannual payments of $600 over 6 years.
A. 12.00% B. 12.20% C. 12.57% D. 12.40%

A transit company for a small town has decided to upgrade its small bus fleet because of significant savings
a nt i c i p a t e d in annual operating cost. Three alternatives are under consideration for effecting the upgrade. The ti
firm=s MARR is 8%, the remaining service life of the bus fleet is 5 years, and available data are as follows:
Plan I Plan 2 Plan 3

Initial Cost of Upgrade S 10,000 S 8,000 $ 12,000

Annual savings in operating cost 2,638 2.219 3,247

Present Worth (PW) of plan 493 796 893

Internal Rate of Return (1RR) 10 percent 12 percent i I percent

26. W hich o f the plans is N OT feasib le? A. plan I B. plan 2

C. plan 3 D. no plan is feasible E. all plans are feasible

26. With the information given above, on what basis is feasibility of a plan decided?
A. cost savings B. IRR or PW C. initial cost D. pay-back period

27. Based on the IRR values given in the table above, which plan is best? A. plan I B.
plan 2 C. plan 3 D. cannot be determined

28. What is the annual worth for plan 2 to the nearest $1?
A. $ 124 B. $ 224 C. $ 199 D. cannot be determined

29. Based on the data provided, which plan is best?

A. plan I B. plan 2 C. plan 3 D. there is no feasible plan

30. Which plan V.ould be best if return on incremental investment were considered?
A. Not enough information to tell B. plan 1 C. plan 2 D. plan 3

Name of Student: Date:

ENGT 331 Test 2 Fall 2009 Page 3