1) Interest that is calculated using only the principal is called:

A)

Simple interest

B)

Effective interest

C)

Add-on interest

D)

Compound interest
Answer ( A )

2) All of the following are examples of cash inflows except:

A)

Income taxes

B)

Asset salvage value

C)

Operating cost reduction

D)

Construction cost savings

Answer ( A )

3) The equation that is used to calculate a present worth from a single future amount is:

A)

P = F (1 + i )n

B)

P = F [1 / (1 + i )n ]

C)

P = F [1 / (1 + i )n ]- 1) / i((1 + i )n ) ]

D)

P = F [(1 + i )n ]- 1) / i]
Answer ( B )

4)

When interest is compounded continuously:

A) The cash flow must also occur continuously.
B) The cash flow must be converted into continuous cash flow.
C) The interest rate must be converted into an annual rate.
D) None of the above.
Answer ( D )

5) In comparing different-life alternatives by the annual worth method, an

assumption inherent in using annual worth values for one life cycle is:

A) All of the costs associated with each asset remain the same in
succeeding life cycles.
B)

The alternatives will be needed for an indefinite period of time.

C) The alternatives will be needed only through the life of the shorterlife alternative.
D) The costs of the alternatives will change only by the inflation or
deflation rate.
Answer ( D
)

6)
In calculating the annual worth of an alternative over one life cycle, the
value obtained is:

A) The same value that would be obtained if two or more life cycles were
used to calculate the
annual worth.
B) The same value that would be obtained in calculating the annual worth of
infinite service for
the alternative.
C) The same value that would be obtained if the present worth of one life
cycle were annualized over the alternative's life cycle.
D) All of the above.
Answer
(D)

7) When multiple rate of return values are possible for a rate of return equation,
one way to come up with a single value which satisfies the equation is:
A) Solve for the internal rate of return
B) Use the project net investment procedure
C) Eliminate all rate of return values above 100%
D) Eliminate all rate of return values below 0%

Answer ( B )

8) In calculating a composite or external rate or return for a given cash flow

sequence, if the reinvestment interest rate is greater than the internal rate of
return, the resulting rate of return will be:
A) Lower than the internal rate of return
B) Greater than the internal rate of return
C) Greater than the reinvestment interest rate
D) Equal to the difference between the internal rate of return and the
reinvestment interest rate

Answer
(B)

9) When there is more than one sign change in the net cash flow of a rate of
return equation, the cash flow sequence is said to be:
A) simple
B) non-conventional
C) conventional
D) regular
Answer ( B )

10) In an incremental investment rate of return analysis of multiple mutually

exclusive alternatives that have different lives, the incremental investment cash
flow must extend through:
A) The life of the longer of the two alternatives under consideration
B) The least common multiple of the lives of the two alternatives under
consideration
C) The longest life of all of the alternatives under consideration
D) The least common multiple of the lives of all of the alternatives under
consideration

Answer ( B )

(Questions 11 through 14 are based on the following statement)

Two mutually exclusive alternatives, A and B, are to be evaluated by the rate of
return (ROR) method. The initial investment for alternative B is greater than that
of alternative A.

11) If the overall ROR of alternative A is less than the MARR and the overall rate
of return of alternative B is greater than the MARR, then:

A) Alternative B should be compared incrementally to alternative A.

B) Alternative B should be selected.
C) The ROR on the increment of investment between A and B is between the
ROR on alternative A and the ROR of alternative B.
D) Alternative A should be selected because it has a lower initial investment
cost.
Answer ( B )

12) If the overall ROR of both alternatives, A and B, is greater than the MARR,
then:
A) Select alternative A because it has a lower initial investment cost.
B) Select alternative B because it has a higher initial investment cost.
C) Conduct an incremental analysis and select A if the ROR on the increment
exceeds the MARR.
D) Conduct an incremental analysis and select B if the ROR on the increment
exceeds the MARR.
Answer ( D )

13) If the overall ROR of both alternatives, A and B, is greater than the MARR
and the ROR of B is greater than that of A, then:
A) Select alternative B, even without an incremental analysis.
B) The ROR on the increment between A and B exceeds the MARR.
C) The ROR on the increment between A and B exceeds the overall rate of
return for alternative A.

D) All of the above.

Answer
(D)
14) If the overall ROR for alternative A exceeds the MARR and the ROR for
alternative B is less than the MARR, then:
A) An incremental analysis is not necessary; select A
B)The ROR on the increment between A and B is less than the MARR.
C) The ROR on the increment between A and B is less than the overall rate of
return on B.
D) All of the above.
Answer ( D )

15) The difference between a modified B/C ratio and a conventional B/C ratio is
that the modified ratio:
A) Subtracts M&O (maintenance and operating) costs from the numerator
B) Places M&O costs in the denominator
C) Places M&O costs in the numerator and disbenefits in the denominator
D) Places disbenefits and M&O costs in the denominator
Answer ( A )