Question1: Choose the correct answer

1. AUBMC is considering the purchase of a new autoclave. This equipment will

cost$250,000. With additional transportation and installation costs of $4,000and
$6,000, respectively. This asset will be depreciated using MACRS-GDS recovery
period of three years.
1.1
The depreciation amount for the first year is:
(a) $65,000
(b) $86,658
(c) $83,325
(d) $43,329
1.2
The BV at the end of the second year is:
(a) $102,707
(b) $115,557
(c) $202,228
(d) $57,772
1.3
If the autoclave is sold during the third year of ownership, the allowable
depreciation charge for the third year is:
(a) $90,506
(b) $18,512
(c) $19,253
(d) $37,025
2. Acme Manufacturing makes their preliminary economic studies using a before-tax
MARR of 15%. More detailed studies are performed on an after-tax basis. If their
effective tax rate is 40%, the after-tax MARR is:
(a) 6%
(b) 9%
(c) 11%
(d) 13%
3. Given a MARR of 10%, which alternative should the company select?
(a) A
(b)B
(c) Do nothing

Alternati IRR
PW(10%
ve
)
4. Suppose that for some year the income of a
A
18.2%
$12,105
small company is $120,000; the expenses are
B
15.6%
$12,432
$60,000; the depreciation is $30,000; and the
effective income tax rate = 40%. On this year, the ATCF is most nearly:
(a) -$12,000
(b) $48,000
(c) $18,000
(d) $30,000

5. The Ford Motor Company is considering three mutually exclusive electronic

stability control systems for protection against rollover of its automobiles. The
investment period is four years (equal lives), and the MARR is 12% per year. Data
for fixturing costs of the systems are given below.
Which alternative, if any, should be selected?
(a) Alternative A
(b)Alternative B
(c) Alternative C
(d)Do nothing

Alternative A
Capital investment
Annual Receipts less
Expenses
Market value at EOY4
IRR

Alternative B

$12,000
$4,000
$3,000
19.2%

Alternative C

$15,800
$5,200
$3,000
18%

$8,000
$3,000
$1,500
23%

6. The MEA has

been
contracting
its overhaul
work to a
Lebanese Company for $40,000 per plane per year. MEA estimates that, by
building a $500,000 maintenance facility with a life of 15 years and residual
(market) value of $100,000 at the end of its life, they could handle their own
overhaul at a cost of only $30,000 per plane per year. What is the minimum
number of planes they must operate to make it economically feasible to build this
facility? The MARR is 10% per year.
(a) 7
(b) 3
(c) 4
(d) 8
(e) 5

7. For the following table, assume a MARR of 10% per year and a useful life for each
alternative of six years that equals the study period. The rank-order of alternatives
from least capital investment to greatest capital investment is Do nothing, A ,
C, B . Complete the IRR analysis by selecting the preferred alternative.
(a) Alternative A

Capital
investment
Annual
Revenues
Annual costs
Market value
IRR

Do nothing
A vs C
vs A
-$15,000
-$2,000
$4,000
-$1,000
$6,000
12.7%

$900
-$150
-$2,200
10.9%

C vs B
-$3,000
$460
$100
$3,350
????

(b)Alternative B
(c) Alternative C
(d)Do nothing

8. For the following table, assume a MARR of 15% per year and a useful life for each
alternative of eight years that equals the study period. The rank-order of
alternatives from least capital investment to greatest capital investment is Z, Y,
W, X . Complete the incremental analysis by selecting the preferred alternative.
Do nothing is not an option.
(a) Alternative
(b)Alternative
(c) Alternative
(d)Alternative

Z
Y
W
X

Z vs Y
9.

Capital
investment
Annual cost
savings
Market value
PW(15%)

Y vs W

-$250

W vs X

-$400

-$650

Your company operates a

fleet of flight trucks that are
$70
$90
$25
used to provide contract
$100
$50
$150
delivery services. As the
$97
$20
????
engineering and technical
manager, you are analyzing
the purchase of 55 new trucks as an addition to the fleet. These trucks would be
used for a new contract the sales staff is trying to obtain. If purchased, the trucks
would cost $21,200 each; estimated use is 20,000 miles per year per truck;
estimated annual operation and maintenance and other related expenses are
$0.45per mile; and estimated annual revenue are $15,000 per year per truck
required and the trucks are MACRS-GDS three-year property class assets. The
analysis period is four years; t=38%; after-tax MARR=15% per year; and the
estimated MV at the end of four years is 35% of the purchase price of the
vehicles.
Table below represent the Cash Flow for each truck (ie. per truck)
9.1
Year

Complete the missing data in the table below:

BTCF

Depreciat
ion

Taxable
Income

Income
Tax

ATCF

-1065.96

405.0648

-21,200
6405.064
8

2860.28

?
1086.906
4

?
4913.093
6

?
?Gain/Loss

?
?

21,200
7065.96

4
4

?
?

9423.4

9.2
The BV at EOY4 (year of
disposal) is:
(a) $0
(b) $785

9.3 Gain or loss at EOY4 is:

(a) $0
(b) $8,750
(c) $6,635

(c) $25,000
(d) $8,750
9.4 NPV of the ATCF is most
nearly:
(a) - $1,952
(b) - $1,780
(c) $1,952
(d) $1,780

(d) $7,420
9.5
Your decision as a technical
manager:
(a) Purchase the trucks
(b) Dont purchase the trucks
(c) No enough data to decide

10. Suppose that you placed a commercial building (warehouse) in service in April
2006. The cost of property is $500,000 which includes $200,000 value of land. The
building will be depreciated using MACRS-GDS method.
10.1Determine the amount of depreciation that is allowed during the first year of ownership:
(a) $3,638
(b) $9,095
(c) $5,457
(d) $2,728.5
10.2
If the building is sold in May 2015. The allowable depreciation charge
for this year is:
(a) $2,243.5
(b) $4,815
(c) $12,980
(d) $2,884.5
11. A highway bridge is being considered for replacement. The new bridge would
cost $X and would last for 20 years. Annual maintenance costs for the new bridge
are estimated to be $24,000. People will be charged a toll of $0.25 per car to use
the new bridge. Annual car traffic is estimated at 400,000 cars. The cost of
collecting the toll consists of annual salaries for five collectors at $10,000 per
collector. The existing bridge can be refurbished for $1,600,000 and would need to
be replaced in 20 years. There would be additional refurbishing costs of $70,000
every five years and regular annual maintenance costs of $20,000 for the existing
bridge. There would be no toll to use the refurbished bridge. If the MARR is 12% ,
what is the maximum acceptable cost (X) of the new bridge?
(a) $1,943,594
(b)$1,570,122
(c) $2,018,641
(d)$2,156,209
12. Consider the following two investment alternatives:

Suppose that your firm needs either machine for only 2 years. The net proceeds
from the sale of machine B are estimated to be $200. What should be the required
net proceeds from the sale of machine A so that both machines could be
considered economically indifferent at an interest rate of 10%?
(a) $850
(b)$750
(c) $700
(d)$800
13. You have been requested to offer a recommendation of one mutually exclusive
industrial sanitation control systems that follow. The MARR is 10% per year.
Capital investment
Annual receipts less expenses
Market value at the end of useful
life
Life in years

Gravity-fed
$24,500
$8,000
$0
5

Vacuum-led
$37,900
$8,000
$0
10

13.1 Assuming that at the end of its useful life, the Gravity-fed system will be
replaced with an identical replacement (the repeatability assumption), which
system would you select?
(a) Gravity-fed system
(b)Vacuum-led system
(c) Do nothing
(d)Case of indifference
13.2 Suppose that the study period has been coterminated at 5 years. The
Estimated MV of the Vacuum-led system is most nearly:
(a) $6,166.3
(b)$23,375
(c) $18,950
(d)$9,170