Economics

Question 1 (5 points)

 

Rate of return (ROR) can be described as the rate earned on the ___________________ of an investment.

Question 1 options:a) 

Principal

b) 

Unrecovered Balance

c) 

Final Installment

d) 

Recovered Balance

Question 2 (5 points)

 

What does a rate of return of –100% mean?

Question 2 options:a) 

A rate of return of –100% means that you broke even on the entire investment.

b) 

A rate of return of –100% means that the entire investment is lost.

c) 

A rate of return of –100% means that the entire investment is recovered.

d) 

A rate of return of –100% means that you lost $100 on the entire investment.

Question 3 (5 points)

 

A-1 Mortgage makes loans with the interest paid on the loan principal rather than on the unpaid balance. For a 4-year loan of $10,000 at 10% per year, what annual payment would be required to repay the loan in 4 years if interest is charged on (a) the principal and (b) the unrecovered balance?

Question 3 options:a) 

(a) Annual payment = $3200

(b) A = $3514.22

b) 

(a) Annual payment = $3350

(b) A = $3299.85

c) 

(a) Annual payment = $2995

(b) A = $3325.60

d) 

(a) Annual payment = $3500

(b) A = $3154.70

Question 4 (5 points)

 

What rate of return per month will an entrepreneur make over a 2½-year project period if he invested $150,000 to produce portable 12-volt air compressors? His estimated monthly costs are $27,000 with income of $33,000 per month.

Question 4 options:a) 

i = 1.9%

b) 

i = 2.5%

c) 

i = 1.2%

d) 

i = 3.2%

Question 5 (5 points)

 

PPG manufactures an epoxy amine that is used to protect the contents of polyethylene terephthalate (PET) containers from reacting with oxygen. The cash flow (in millions) associated with the process is shown below. Determine the rate of return.

Year

Cost, $

Revenue, $

0

–10

—

1

–4

2

2

–4

3

3

–4

9

4

–3

9

5

–3

9

6

–3

9

Question 5 options:a) 

i = 6.50%

b) 

i = 8.37%

c) 

i = 14.6%

d) 

i = 10.49%

Question 6 (5 points)

 

What is the difference between a conventional and a nonconventional cash flow series?

Question 6 options:a) 

In a conventional cash flow series, there is only one sign change in the net cash flow. A nonconventional series has more than one sign change.

b) 

In a conventional cash flow series, there are no sign changes in the net cash flow. A nonconventional series has only one sign change.

c) 

In a conventional cash flow series, there two or more sign changes in the net cash flow. A nonconventional series has only one sign change.

d) 

In a conventional cash flow series, there is only one sign change in the net cash flow. A nonconventional series has only one sign change.

Question 7 (5 points)

 

Five years ago, a company made a $5 million investment in a new high-temperature material. The product was not well accepted after the first year on the market. However, when it was reintroduced 4 years later, it did sell well during the year. Major research funding to broaden the applications has cost $15 million in year 5. Determine the rate of return for these cash flows (shown below in $1000s).

Year

Net Cash Flow, $

0

–5,000

1

4,000

2

0

3

0

4

20,000

5

–15,000

Question 7 options:a) 

i = 48.4% per year

b) 

i = 38.5% per year

c) 

i = 34.6% per year

d) 

 i = 44.1% per year

Question 8 (5 points)

 

___________________ refers to the interest rate that is used for funds that are released from a project before the project is over.

Question 8 options:a) 

Composite Tax Rate

b) 

Hurdle Rate

c) 

Corporate tax rate

d) 

Reinvestment Rate

Question 9 (5 points)

 

What is the overall rate of return on a $100,000 investment that returns 20% on the first $30,000 and 14% on the remaining $70,000?

Question 9 options:a) 

i = 16.25%

b) 

i = 15.8%

c) 

i = 15.5%

d) 

i = 16.1%

Question 10 (5 points)

 

If all of the incremental cash flows are negative, what is known about the rate of return on the incremental investment?

Question 10 options:a) 

The rate of return on the increment of investment is more than 100%.

b) 

The rate of return on the increment of investment is more than 0%.

c) 

The rate of return on the increment of investment is less than 0%.

d) 

The rate of return on the increment of investment is equal to 0%.

Question 11 (5 points)

 

A plastics company is considering two injection molding processes. Process X will have a first cost of $600,000, annual costs of $200,000, and a salvage value of $100,000 after 5 years. Process Y will have a first cost of $800,000, annual costs of $150,000, and a salvage value of $230,000 after 5 years.  Which process should the company select on the basis of a rate of return analysis, if the MARR is 20% per year?

Question 11 options:a) 

i > MARR; select process Y.

b) 

i < MARR; select process X.

c) 

i < MARR; select process Y.

d) 

 i > MARR; select process X.

Question 12 (5 points)

 

The manager of a canned food processing plant is trying to decide between two labeling machines. Determine which machine should be selected on the basis of rate of return with a MARR of 20% per year.

Machine A

Machine B

First cost, $

–15,000

–25,000

Annual operating cost, $/year

–1,600

–400

Salvage value, $

3,000

4,000

Life, years

2

4

Question 12 options:a) 

i > MARR; Select machine C.

b) 

i > MARR; Select machine A.

c) 

i > MARR; Select machine B.

d) 

i > MARR; Select machine D.

Question 13 (5 points)

 

The incremental cash flows for alternatives M and N are shown below. Determine which should be selected, using an AW-based rate of return analysis. The MARR is 12% per year, and alternative N requires the larger initial investment.

Incremental

Year

Cash Flow, $(N 2 M)

0

–22,000

1–8

+4,000

9

+12,000

Question 13 options:a) 

i > MARR; Select alternative N

b) 

i > MARR; Select alternative M

c) 

i < MARR; Select alternative O

d) 

i < MARR; Select alternative P