Question 1

For the purpose of comparison, what alternative should be used in assessing an independent project?
A)the "do nothing" alternative
B)other projects, earning MARR or higher interest rate
C)putting money into a bank to earn a bank interest rate
D)investing money in an alternative project that can recoup the investment
E)investing money in an alternative project, which can earn the same interest rate as an independent project

Accepted Answer

The "do nothing" alternative is used as a baseline for comparison in assessing an independent project to understand the impact of undertaking the project versus not taking any action. This helps in evaluating the benefits or returns of the project against the scenario where no investment is made.

Question 2

If project A has present worth of -$27 000 and project B has present worth of -$26 000, then
A)project B should be accepted on the basis of maximum benefits
B)project A should be accepted because it has larger absolute value.
C)project B should be accepted on the basis of minimum costs.
D)the situation requires additional assessment since some of the costs or benefits might not be considered.
E)the decision cannot be made because of uncertainty.

Accepted Answer

Project B should be accepted on the basis of minimum costs because it has a less negative present worth (-$26,000) compared to project A (-$27,000), indicating lower costs.

Question 3

The annual worth of a project is measured in terms of
A)dollars.
B)dollars per unit.
C)dollars per year.
D)dollars per unit per year.
E)percentage.

Accepted Answer

The annual worth of a project is measured in terms of dollars per year, which reflects the yearly financial performance or benefit of the project.

Question 4

A project requires $10 000 as initial investment and will earn a revenue of $2 000 per year over the next seven years. The interest rate is 5.0% per year. What is the present worth of the project's costs?
A)$1 573
B)$2 000
C)$8 681
D)$10 000
E)$11 573

Accepted Answer

The present worth of the project's costs is simply the initial investment, which is $10,000.

Question 5

What is the basis for decision-making using the present worth comparison method?
A)to maximize the present worth of a project at the minimum acceptable rate of return
B)to maximize the benefits of a project at the minimum acceptable rate of return
C)to minimize the costs of a project at the minimum acceptable rate of return
D)to maximize the difference between the project's benefits and costs at the minimum acceptable rate of return
E)to minimize the difference between the project's costs and benefits at the minimum acceptable rate of return

Accepted Answer

The present worth comparison method aims to maximize the present worth of a project, ensuring that the project's value is maximized at the minimum acceptable rate of return.

Question 6

Two projects are mutually exclusive if
A)the expected costs and benefits of one project do not depend on whether or not the other project is chosen.
B)the expected costs and benefits of one project depend on whether the other project is chosen.
C)if it is impossible to do both at the same time
D)in the process of choosing one project at least one other project is chosen for comparison.
E)the possibility of the implementation of one project directly depends on whether or not the other one is implemented.

Accepted Answer

Mutually exclusive projects are those where the selection of one project prevents the initiation of the other, meaning they cannot be pursued simultaneously.

Question 7

What is the payback period?
A)a period of time over which an initial investment can be recovered fully assuming market interest rate to be equal to the MARR
B)a period of time after which a project starts generating profit
C)a period of time over which an initial investment cannot be recovered
D)a period of time over which an initial investment can be recovered fully
E)a period of time over which an initial investment can be recouped assuming zero interest rate

Accepted Answer

The answer of What is the payback period?
A)a period of...

Question 8

The minimum acceptable rate of return (MARR)is
A)an interest rate, which is equal to a current bank interest rate.
B)the least interest rate among all alternative projects.
C)a highest interest rate among all alternative projects.
D)an interest rate that allows an investor to recoup the investment.
E)an interest rate that must be earned for a project to be accepted.

Accepted Answer

The minimum acceptable rate of return (MARR) is essentially the lowest return rate that an investor is willing to accept for an investment or project. It is used as a benchmark to decide whether to proceed with the project. It is not necessarily tied to current bank rates, nor is it the least or highest rate among alternatives. It is specifically the threshold rate that makes an investment worthwhile.

Question 9

What is the present worth of an independent project that requires initial investment of $50 000 and annual maintenance costs of $4 000 for 10 years at a 4% minimum acceptable rate of return?
A)-$4 000
B)-$32 444
C)-$54 000
D)-$82 444
E)-$17 556

Accepted Answer

The present worth of an independent project can be calculated using the formula for the present value of a series of cash flows. The initial investment is a cash outflow of $50,000. The annual maintenance costs of $4,000 for 10 years can be considered as an annuity. The present value of this annuity can be calculated using the formula PV = PMT * [(1 - (1 + r)^-n) / r], where PMT is the annual payment ($4,000), r is the annual interest rate (4% or 0.04), and n is the number of periods (10 years). The present value of the maintenance costs is $4,000 * [(1 - (1 + 0.04)^-10) / 0.04] = $33,444.24. Adding this to the initial investment of $50,000 gives a total present worth of $50,000 + $33,444.24 = $83,444.24. Since the closest option is D) -$82,444, it is considered the correct answer. This calculation takes into account the time value of money, showing the total cost of the project in today's dollars, considering both the initial investment and the ongoing maintenance costs.

Question 10

A project is marginally acceptable if
A)it earns positive present worth at the minimum acceptable rate of return.
B)it earns negative present worth at the minimum acceptable rate of return.
C)the present worth of a project is zero at the minimum acceptable rate of return.
D)it earns more than the minimum acceptable rate of return.
E)the difference between project's costs and benefits is positive at the minimum acceptable rate of return.

Accepted Answer

A project is marginally acceptable if the present worth of the project is zero at the minimum acceptable rate of return, indicating it just meets the required return without surplus or deficit.

Question 11

A project requires $10 000 as initial investment and will earn a revenue of $3 000 per year over the next five years. Annual interest rate is 5.4%. What is the present worth of the project's benefits?
A)$2 846
B)$6 348
C)$7 154
D)$10 000
E)$12 846

Accepted Answer

The answer of A project requires $10 000 as initial...

Question 12

The annual worth method is
A)similar to the present worth method but transforms all annuities to a uniform series at the minimum acceptable rate of return.
B)similar to the present worth method but transform all annuities to arithmetic gradient series at the minimum acceptable rate of return.
C)methodologically different from the present worth method since it does not convert all annuities to the present worth at the minimum acceptable rate of return.
D)similar to the present worth method since it transforms all annuities to the present worth as a single payment.
E)similar to the present worth method except that all payments are converted into a geometric gradient series.

Accepted Answer

The annual worth method is similar to the present worth method in that it evaluates the worth of investments or projects by converting all cash flows to a uniform annual series, using the minimum acceptable rate of return. This allows for a direct comparison of the annual economic impact of different options.

Question 13

Two mutually exclusive projects with the same service lives of 2 years are characterized by first costs of $100 million and $120 million respectively and annual savings of $60 million and $70 million respectively. If the MARR is 10%, which one should be chosen on the basis of the present worth comparison method?
A)The second one because it has higher annual savings.
B)The first one because its present worth is higher.
C)The second one because its present worth is higher.
D)The first one because incremental present worth is positive.
E)Neither because both produce negative present worth.

Accepted Answer

The present worth (PW) of each project is calculated using the formula PW = -C + (S/A, i%, n), where C is the initial cost, S is the annual savings, A is the annuity factor (A = (1 - (1 + i)^-n) / i), i is the interest rate (MARR), and n is the number of years. For the first project, PW = -$100M + ($60M/A, 10%, 2) and for the second project, PW = -$120M + ($70M/A, 10%, 2). Calculating these values shows that the first project has a higher present worth, making it the preferable choice.

Question 14

Christine Robichaud, an engineer at Opus Ltd., has a $70 000 budget for upgrading the company's warehouse. She has calculated that the improvements could be completed in three months from now and would consume the entire budget. Due to these improvements the company saves $9 000 by the end of the first year, $14 000 by the end of the second year, and $35 000 by the end of the third year, $54 000 by the end of the fourth year and $17 000 by the end of the fifth year. What is the payback period for this project?
A)1
B)2
C)3
D)4
E)5

Accepted Answer

The payback period is the time it takes for the project to recoup its initial investment. Here, the cumulative savings by the end of each year are: Year 1: $9,000; Year 2: $23,000 ($9,000 + $14,000); Year 3: $58,000 ($23,000 + $35,000); Year 4: $112,000 ($58,000 + $54,000); Year 5: $129,000 ($112,000 + $17,000). The initial investment of $70,000 is recouped between the third and fourth years, making the correct answer 4 years.

Question 15

For comparison purposes, in order to evaluate alternatives with unequal lives one should
A)repeat service life of each alternative at least three times.
B)assume some certain study period for evaluation by introducing salvage values for each alternative.
C)assume that the service life of each project is indefinite.
D)apply only annual worth comparison method for each alternative.
E)apply only present worth comparison method for each alternative.

Accepted Answer

To evaluate alternatives with unequal lives fairly, it's common to assume a certain study period for all alternatives and introduce salvage values for each to account for their value at the end of the study period. This allows for a more apples-to-apples comparison of their economic worth over the same timeframe.

Question 16

The best way to compare two projects with unequal lives is the
A)payback period.
B)present worth comparison method.
C)annual worth comparison method.
D)study period method.
E)incremental present worth comparison method.

Accepted Answer

The answer of The best way to compare two projects...

Question 17

Mutually exclusive projects can be compared in terms of present worth if
A)they have the same service life.
B)they have the same costs.
C)they have the same benefits.
D)they have the same rate of return.
E)they have the same depreciation rate.

Accepted Answer

Mutually exclusive projects can be compared in terms of present worth if they have the same service life, ensuring a fair comparison over the same time period.

Question 18

A contingent project is an example of
A)independent projects.
B)mutually exclusive projects.
C)related but not mutually exclusive projects.
D)public projects.
E)incremental projects.

Accepted Answer

Contingent projects are related but not mutually exclusive, meaning the acceptance of one project may depend on the acceptance of another, but they can both be undertaken if they are beneficial.

Question 19

If one project cannot be done by itself, a second project can be done alone, and both of them can be done together then the first project is said to be
A)independent from the second project.
B)related but not mutually exclusive to the second project.
C)mutually exclusive to the second project.
D)contingent on the second project.
E)interrelated with the second project.

Accepted Answer

The first project's ability to be done only when combined with the second project indicates it is contingent on the second project.

Question 20

An investor wants to invest in the trucking business. To run this business, 10 trucks should be acquired. The market price of a truck is $50 000. It is also necessary to pay $390 000 per year as wages to the truck drivers. Vehicle repair and maintenance costs are $10 000 per year. What is the annual worth of the project's costs at 5% MARR over a 10-year period?
A)$400 000
B)$406 475
C)$454 750
D)$464 750
E)$551 800

Accepted Answer

The annual worth of the project's costs includes the capital cost of the trucks, wages, and maintenance. The capital cost is calculated using the capital recovery factor for 10 trucks at $50,000 each, with a 5% MARR over 10 years. The formula for the capital recovery factor is: A = P(A/P, i, n). Adding the annual wages and maintenance gives the total annual cost.

Quiz 4: Comparison Methods: Part I

For the purpose of comparison, what alternative should be used in assessing an independent project?

If project A has present worth of -$27 000 and project B has present worth of -$26 000, then

The annual worth of a project is measured in terms of

A project requires $10 000 as initial investment and will earn a revenue of $2 000 per year over the next seven years. The interest rate is 5.0% per year. What is the present worth of the project's costs?

What is the basis for decision-making using the present worth comparison method?

Two projects are mutually exclusive if

What is the payback period?

The minimum acceptable rate of return (MARR) is

What is the present worth of an independent project that requires initial investment of $50 000 and annual maintenance costs of $4 000 for 10 years at a 4% minimum acceptable rate of return?

A project is marginally acceptable if

A project requires $10 000 as initial investment and will earn a revenue of $3 000 per year over the next five years. Annual interest rate is 5.4%. What is the present worth of the project's benefits?

The annual worth method is

For comparison purposes, in order to evaluate alternatives with unequal lives one should

The best way to compare two projects with unequal lives is the

Mutually exclusive projects can be compared in terms of present worth if

A contingent project is an example of

If one project cannot be done by itself, a second project can be done alone, and both of them can be done together then the first project is said to be