1. Given a MARR, an alternative project is considered acceptable by the following ratio:
a. Sum(Costs) / Sum(Benefits) >= 1.0.
b. PW(Benefits) / PW(Costs) >= 1.0.
c. PW(Costs) / PW(Benefits) >= 1.0.
d. Sum(Benefits) / Sum(Costs) >= 1.0..
2. When discussing the concept of inflation, two types of cash flows are of particular interest - Actual Dollars (A$) and Real Dollars (R$). Which of the following is not a definition of Real Dollars?
a. Real Dollars do not carry the effects of inflation.
b. Real Dollars are always expressed in terms of some constant dollars (or value) for a particular "base" year.
c. Real Dollars are often thought of as the physical amount of money used for investments and payments.
d. Real Dollars are sometimes referred to as the "constant purchasing power dollars"
3. Cash flow diagrams summarize the flow of money over time and include
a. first costs, operations and maintenance costs, overhaul costs, revenues, and salvage value.
b. fixed and variable costs only.
c. first costs, operations and maintenance costs, sunk costs, revenues, and salvage value.
d. only rough cost estimates.
4. While the Income Statement (also known as the Profit and Loss Statement) describes a firm's performance over a period of time, the Balance Sheet:
a. balances the firm's revenues with expenses, depreciation, taxes, and the total gains or losses
b. describes a firm's financial condition at a specific time by listing the firm's assets, liabilities, and equity on a specified date.
c. is a separate and independent financial statement that is often used to obtain the firm's financial ratios
d. All of the above
5. If MARR is not known,
a. neither present worth nor internal rate of return can be estimated.
b. neither equivalent uniform annual worth or internal rate of return can be estimated.
c. neither present worth nor equivalent uniform annual worth can be estimated.
d. neither future worth or internal rate of return can be estimated.
6. In an accounting context, depreciation is
a. a systematic allocation of the cost of an asset over its depreciable life related to deterioration, obsolescence, or consumption of its useful life.
b. the risk adjusted, weighted average cost of liabilities and equity.
c. a disbursement for governmental services rendered and needs to be considered in a project's cost.
d. the sum of expenses for labor, materials, utilities, and other direct costs of producing a product.
7. The mathematical relationship between the inflation, real, and market interest rates is given as:
a. i' = i (1+ f) -n
b. i' = i + f + (i) (f)
c. i' = i (1+ f) n
d. i = i' + f + ( i' ) (f)
where i = market interest rate, i' = real interest rate, and f = inflation rate.
8. Which of the following assets cannot be depreciated?
a. Land.
b. Equipment used to build capital improvements.
c. Buildings.
d. Office equipment.
9. For business firms, taxable income equals
a. net income - business expenses (except capital outlays) + depreciation and depletion charges
b. gross income - business expenses (including capital outlays) + depreciation and depletion charges
c. gross income - business expenses (except capital outlays) - depreciation and depletion charges.
d. net income - business expenses (including capital outlays) - depreciation and depletion charges.
10. In general, corporate tax rates include
a. personal exemptions plus either itemized or standard deductions for each employee.
b. a base tax plus a percentage × (taxable income - bracket minimum income) for each tax bracket.
c. personal exemptions for each employee plus a percentage × (taxable income - minimum income) for each tax bracket.
d. a base tax plus either itemized or standard deductions for each employee.
11. (During the last five years, general inflation has held steady at a 3.5% per year average. A company is considering the purchase of a delivery van for $33,500. The company's prime lender offers to finance the purchase at a 6.7% interest rate. After taking inflation into account, what is the real interest rate on the loan?
12. A special tool and jig for fabricated metal products was purchased for $85,000, has a salvage value of $7,000, and has a useful life of 5 years. If the asset is placed in service on September 1 {the company's fiscal year runs from January 1 to December 31}, what is its straight line depreciation charge for the first year of service?
13. For the asset in question 12, what is the depreciation charge for year three of its useful life using MACRS depreciation and given it is a GDS 3-year property? (see GDS schedule on page 10 of this exam)
14. Last fiscal year 01-Jan to 31-Dec, Norco, Inc., had a gross revenue of $32,718,166, cost of goods sold and interest expenses of $27,883,785, and total depreciation charges of $2,676,818. Also on October 1 of last year, Norco completed purchase of and placed in service a new automated production line with an installed initial cost of $1,124,336. Compute Norco's taxable income for last year.
15. The state in which Zyn Inc. operates imposes a 11.0% corporate tax rate. Zyn had a taxable income of $14,831,834 last year. Referring to the Federal Tax Schedule on page 10 of this exam, calculate Zyn's total taxes for last year.
16. By installing a unit of automated packaging equipment, a company can save $40,000 per year in labor. The equipment has a useful life of 8 years and no salvage value. The company uses a MARR of 8.0% per year. What is the maximum the company can pay for the automated packaging equipment now?
17. The initial cost of a piece of equipment is $21,325, and it has a salvage value at the end of its 7 year life of $9,100. Maintenance cost is estimated to be $1,700 the first year and increase $400 per year to the end of its 7 year life. If the company uses MARR of 12.0%, what is the equivalent uniform annual cost?
18. Two pumps being considered for purchase to meet continuing EPA requirements beyond their respective useful lives. If MARR = 7.0%, which pump should be purchased?
Pump A Pump B
Initial Cost (-$7,000) (-$5,000)
Salvage Value $1,500 $1,000
Useful life, years 12 9
19. A firm is seeking to decide on which of two devices to purchase. Both devices have useful lives of 8 years and $0 salvage value. Given MARR = 10.0%, use incremental BenefitCost analysis to decide on which device to purchase.
Device A Device B Increment
Initial Cost (-$1,500) (-$2,000)
Annual Savings $500 $850
20. A project has the following after-tax cash flows in actual dollars. The company uses a real interest rate i' = 6%, and inflation is expected to maintain at a 2% average. Convert the cash flows to real dollars and compute the net present worth in real dollars.
Actual $ Real $ Present Real$
Year Cash Flow Cash Flow Worth NPW
0 ($12,000)
1 $ 5,662
2 $ 5,694
3 $ 4,729
21. A city is offering to install and operate a water pumping station to provide service to a proposed new production facility. The station will cost $25,000 now plus $3,000 in operating costs for the next 3 years, all measured in year-0 real dollars. To reimburse the city, the new business must pay a fixed uniform annual fee, A, at the end of each year for 3 years to cover the construction and operating costs of the station. It is agreed that the city should receive a 3.8% real rate of return after taking an inflation rate of 5.0% into account. Determine the equivalent uniform annual cost in actual dollars to the new business.
| Year |
Constant$ |
Actual$ |
PW(A$) |
| 0 |
$25,000 |
|
|
| 1 |
$3,000 |
|
|
| 2 |
$3,000 |
|
|
| 3 |
$3,000 |
|
|