Economics

Question 1 (5 points)

 

Indicate whether the following characteristics are primarily associated with public sector or private sector projects.

(a) Profits

(b) Taxes

(c) Disbenefits

(d) Infinite life

Question 1 options:a) 

(a) Private      

(b) Public     

(c) Public       

(d) Private

b) 

(a) Private      

(b) Private     

(c) Public       

(d) Private

c) 

(a) Private      

(b) Private     

(c) Public       

(d) Public

d) 

(a) Private      

(b) Public     

(c) Private       

(d) Public

Question 2 (5 points)

 

The estimated annual cash flows for a proposed city government project are costs of $450,000 per year, benefits of $600,000 per year, and disbenefits of $100,000 per year. Determine the B/C ratio.

Question 2 options:a) 

B/C = 1.11

b) 

B/C = 0.96

c) 

B/C = 1.01

d) 

B/C = 1.15

Question 3 (5 points)

 

The estimated annual cash flows for a proposed city government project are costs of $450,000 per year, benefits of $600,000 per year, and disbenefits of $100,000 per year. Determine the value of B – C.

Question 3 options:a) 

B-C = $75,000

b) 

B-C = $43,000

c) 

B-C = $50,000

d) 

B-C = $65,000

Question 4 (5 points)

 

The modified B/C ratio for a city-owned hospital heliport project is 1.7. If the initial cost is $1 million and the annual benefits are $150,000, what is the amount of the annual M&O costs used in the calculation, if a discount rate of 6% per year applies? The estimated life is 30 years.

Question 4 options:a) 

M&O costs = $27,495 per year

b) 

M&O costs = $26,495 per year

c) 

M&O costs = $24,495 per year

d) 

M&O costs = $25,495 per year

Question 5 (5 points)

 

Solar and conventional alternatives are available for providing energy at a remote space research site. The costs associated with each alternative are shown below. Use the B/C method to determine which system should be selected at a discount rate of 0.75% per month over a 6-year study period.

Conventional

Solar

Initial cost, $

2,000,000

4,500,000

M&O cost, $/month

50,000

10,000

Salvage value, $

0

150,000

Question 5 options:a) 

Select both systems

b) 

Select the conventional system

c) 

Select the solar system

d) 

Select Do Nothing

Question 6 (5 points)

 

Three alternatives identified as X, Y, and Z were evaluated by the B/C method. The analyst, Joyce, calculated project B/C values of 0.92, 1.34, and 1.29. The alternatives are listed in order of increasing total equivalent costs. She isn’t sure whether an incremental analysis is needed.

If these are independent projects, which alternatives must be compared incrementally?

Question 6 options:a) 

Accept Y and Z

b) 

Accept X and Z

c) 

Accept Y only

d) 

Accept X and Y

Question 7 (5 points)

 

The four mutually exclusive alternatives below are being compared using the B/C method. What alternative, if any, should be selected?

Incremental B/C

Initial

When Compared

Investment,

with Alternative

Alternative

$ Millions

B/C Ratio

J

K

L

M

J

20

1.10

—

K

25

0.96

0.40

—

L

33

1.22

1.42

2.14

—

M

45

0.89

0.72

0.80

0.08

—

Question 7 options:a) 

Select alternative M

b) 

Select alternative L

c) 

Select alternative K

d) 

Select alternative J

Question 8 (5 points)

 

When a B/C analysis is conducted,

Question 8 options:a) 

The benefits and costs must be expressed in terms of their future worths

b) 

The benefits and costs must be expressed in terms of their present worths

c) 

The benefits and costs must be expressed in terms of their annual worths

d) 

The benefits and costs can be expressed in terms of PW, AW or FW

Question 9 (5 points)

 

In a conventional B/C ratio,

Question 9 options:a) 

Disbenefits and M&O costs are added to costs.

b) 

Disbenefits are subtracted from benefits, and M&O costs are added to costs.

c) 

Disbenefits and M&O costs are subtracted from benefits

d) 

Disbenefits are added to costs, and M&O costs are subtracted from benefits

Question 10 (5 points)

 

In a modified B/C ratio analysis,

Question 10 options:a) 

Disbenefits and M&O costs are added to costs.

b) 

Disbenefits are subtracted from benefits, and M&O costs are added to costs.

c) 

Disbenefits and M&O costs are subtracted from benefits.

d) 

Disbenefits are added to costs, and M&O costs are subtracted from benefits.

Question 11 (5 points)

 

In evaluating three mutually exclusive alternatives by the B/C method, the alternatives were ranked in terms of increasing total equivalent cost (A, B, and C, respectively), and the following results were obtained for the project B/C ratios: 1.1, 0.9, and 1.3. On the basis of these results, you should

Question 11 options:a) 

Compare A and C incrementally

b) 

Select A

c) 

Select A and C

d) 

Select C

Question 12 (5 points)

 

Identify a basic assumption made specifically about the challenger alternative when a replacement study is performed.

Question 12 options:a) 

Challenger is the worst alternative to defender now and it will be the worst for all succeeding life cycles

b) 

Challenger is the best alternative to defender now and it will be the best for all succeeding life cycles

c) 

Challenger is the best alternative to defender now but it will change for all succeeding life cycles

d) 

Defender is the best alternative to challenger now and it will be the best for all succeeding life cycles

Question 13 (5 points)

 

New microelectronics testing equipment was purchased 2 years ago by Mytesmall Industries at a cost of $600,000. At that time, it was expected to be used for 5 years and then traded or sold for its salvage value of $75,000. Expanded business in newly developed international markets is forcing the decision to trade now for a new unit at a cost of $800,000. The current equipment could be retained, if necessary, for another 2 years, at which time it would have a $5000 estimated market value. The current unit is appraised at $350,000 on the international market, and if it is used for another 2 years, it will have M&O costs (exclusive of operator costs) of $125,000 per year. Determine the values of P, n, S, and AOC for this defender if a replacement analysis were performed today.

Question 13 options:a) 

  P = market value = $350,000

AOC = $125,000 per year

     n = 5 years

     S = $6,000

b) 

     P = market value = $350,000

AOC = $100,000 per year

     n = 2 years

     S = $6,000

c) 

   P = market value = $250,000

AOC = $125,000 per year

     n = 3 years

     S = $5,000

d) 

     P = market value = $350,000

AOC = $125,000 per year

     n = 2 years

     S = $5,000

Question 14 (5 points)

 

Halcrow, Inc., expects to replace a downtime tracking system currently installed on CNC machines. The challenger system has a first cost of $70,000, an estimated annual operating cost of $20,000, a maximum useful life of 5 years, and a $10,000 salvage value anytime it is replaced. At an interest rate of 10% per year, determine its economic service life and corresponding AW value.

Question 14 options:a) 

ESL is 1 year

b) 

ESL is 3 years

c) 

ESL is 5 years

d) 

ESL is 4 years

Question 15 (5 points)

 

What is meant by the opportunity-cost approach in a replacement study?

Question 15 options:a) 

The opportunity cost refers to the recognition that the trade-in value of the defender is foregone when this asset is retained in a replacement study.

b) 

The opportunity cost refers to the recognition that the trade-in value of the defender is foregone when this asset is traded in a replacement study.

c) 

The opportunity cost refers to the recognition that the trade-in value of the challenger is foregone when this asset is retained in a replacement study.

d) 

The opportunity cost refers to the recognition that the trade-in value of the defender is foregone when this asset is sold in a replacement study.

Question 16 (5 points)

 

Why is it suggested that the cash flow approach not be used when one is performing a replacement study?

Question 16 options:a) 

The cash flow approach will only yield the proper decision when the defender and challenger have the same lives.

b) 

The cash flow approach will only yield the proper decision when the defender has a longer life than the challenger.

c) 

The cash flow approach will only yield the proper decision when the defender and challenger have unequal lives.

d) 

The cash flow approach will only yield the proper decision when the defender has a shorter life than the challenger.

Question 17 (5 points)

 

The economic service life of an asset is:

Question 17 options:a) 

The length of time that will yield the lowest annual worth of costs

b) 

The longest time that the asset will still perform the function that it was originally purchased for.

c) 

The time required for its market value to reach the originally estimated salvage value

d) 

The length of time that will yield the lowest present worth of costs

Question 18 (5 points)

 

In a replacement study conducted last year, it was determined that the defender should be kept for 3 more years. Now, however, it is clear that some of the estimates made last year for this year and next year have changed substantially. The proper course of action is to:

Question 18 options:a) 

Replace the existing asset 2 years from now, as was determined last year.

b) 

Replace the existing asset now.

c) 

Conduct a new replacement study using the new estimates

d) 

Conduct a new replacement study using last year’s estimates.