QUIZ 1 (A) – Monday

1. You win the lottery and get $1,000,000. You decide that you want to invest all of the money in a savings account.
However your bank has three different plans. In 5 years from now which plan will provide you with more money.
Plan 1: The bank gives you a 8% interest rate and compounds the interest each month
Plan 2: The bank gives you a 12% interest rate and compounds the interest every 2 months
Plan 3: The bank gives you a 10% interest rate and compounds quarterly

2. A man buys a car for $15,000 with no money down. He pays for the car in 40 equal monthly payments with
interest at 12% per annum, compounded monthly. What is his monthly loan payment?

QUIZ 1 (B) – Monday

1. A manufacturing company made an investment 10 years ago that is now worth $1,000,000. How much was the
initial investment:
a. at a simple interest rate of 15% per year?

b. at an interest rate of 15% per year compounding annually?

2. A car may be purchased with a $3,000 down payment now and 60 monthly payments of $480. If the interest rate is
10% compounded monthly, what is the price of the car?
QUIZ 1 (1) – Thursday

1. Select the best of the following five alternatives. Assume the investment is for a period of 4 years and P =
$10,000.
a. 10% interest rate compounded daily

b. 11% interest rate compounded quarterly

c. 12% interest rate compounded yearly

2. How much must be deposited now at 6% interest to produce $300 at the end of every year for 10 years?

QUIZ 1 (2) – Thursday

1. What is effective interest rate per annum corresponds to a nominal rate of 15% compounded semi-annually?

2. The Texas Highway Department expects the cost of maintanance for a particular piece of heavy equipment to be
$5,000 in year 1, $5,500 in year 2, and amounts increasing by $500 through year 10. At an interest rate of 10% per
year compounding annually, the present worth of the maintanance is ….
QUIZ 2 (A) – Monday

1. Investment in a crane is expected to produce profit from its rental of $15,000 the first year it is in service. The
profit is expected to decrease by $2,500 each year thereafter. At the end of six years assume the salvage value is
zero. At 12% interest the present worth of the profits is …

2. A pump is required for 10 years at a remote location. The pump can be driven by an electric motor if a power line
is extended to the site. Otherwise, a gasoline engine will be used. Use an annual cash flow analysis to determine,
based on the following data and a 10% interest rate, how the pump should be powered.

Gasoline Electric
First Cost $24000 $6000
Annual Operating Cost $1600 $1000
Annual Maintenance Cost $400 $100
Salvage value $400 $800
Useful life, in years 5 10

QUIZ 2 (B) – Monday

1. A piece of land may be purchased for $500,000 to be strip-mined for the underlying coal. Annual net income will
be $150,000 for 10 years. At the end of the 10 years, the surface of the land will be restored as required by a
federal law on strip mining. The reclamation will cost $1 million more than the resale value of the land after it is
restored. Using a 10% interest rate, determine whether the project is desirable.
 2. A company must decide whether to buy Machine A or Machine B:

A B
Initial Cost $12000 $20000
Useful life, in years 5 10
End-of-useful-life salvage value $5000 $5000
Annual maintenance $1000 $1500
which machine to buy if the interest is 10%?

QUIZ 2 (1) – Thursday

1. Using an eight-year analysis period and a 10% interest rate, determine which machine should be selected:

Machine A Machine B
First Cost 10500 21000
Uniform annual benefit 3400 4100
Useful lfe, in years 4 8

2. When he started to work on his 24th birthday, Mr. Kim decided to invest money each month with the objective of
having two million dollars by the time he retires on his 60th birthday. If he expects his investment to yield 20% per
annum, compounded monthly, how much should he invest each month?
QUIZ 2 (2) – Thursday

1. PT Indofood is considering establishing a new machine to automate a meat packing process. The machine will
save $60,000 in labor annually. The machine can be purchased for $300,000 today and will be used for a period of
10 years. It is has a salvage value of $20,000 at the end of its useful life. The new machine will require an annual
maintenance cost of $10,000. The corporation has a minimum rate of return of 12%. Do you recommend
automating the process?

2. A project has a first cost of $10,000, net annual benefits of $2,000, and a salvage value of $3,000 at the end of its
10-year useful life. The project will be replaced identically at the end of 10 years, and again at the end of 20 years.
What is the present worth of the entire 30 years of service if the interest rate is 10%?
QUIZ 2 (Susulan)

1. Iron Wing Construction Inc. has asked to you help them select a new backhoe. Youhave a choice between a wheel-
mounted version, which costs $50,000 and has an expected life of 5 years and a salvage value of $2000, and a
track-mounted one, which costs $80,000, with a 10- year life and an expected salvage value of $10,000. Both
machines will achieve the same productivity. Interest is 8%. Which one will you recommend? Use a present worth
analysis.

2. A company is considering two alternatives for manufacturing a certain part. Method R will have a first cost of
$40,000, an annual operating cost of $25,000, and a $10,000 salvage value after its five year life. Method S will
have an initial cost of $100,000, an annual operating cost of $15,000, and a $12,000 salvage value after its 10 year
life. At an interest rate of 12% per year. Which one will you recommend ?
QUIZ 3 (A) – Monday

1. Consider the three alternatives:

Year A B Do Nothing
0 -$100 - $150 0
1 30 43 0
2 30 43 0
3 30 43 0
4 30 43 0
5 30 43 0

Which alternative should be selected:

(a) If MARR =6%?

(b) If MARR =8%?

(c) If MARR = 10%?

QUIZ 3 (B) – Monday

1. Consider the two alternatives:

Year Buy X Buy Y

0 - $100 - $50
1 +31.5 16.5
2 +31.5 16.5
3 +31.5 16.5
4 +31.5 16.5
RoR 9.9% 12.1%
Which alternative should be selected if MARR = 6%?
QUIZ 3 (1) – Thursday

1. An oil company plans to purchase a piece of vacant land on the corner of two busy streets for $70,000. On
properties of this type, the company installs businesses of two different types.

Plan Type of Business Improvement Cost *

Conventional gas station with service
A $ 75,000
facilities for lubrication,oil changes, etc.
Automatic carwash facility with gasoine
B $ 230,000
pump island in front
*Improvements costs does not include $70,000 for the land

In each case, the estimated useful life of the improvements is 15 years. The salvage value for each is estimated
to be the $70,000 cost of the land. The net annual income, after paying all operating expenses, is projected as
follows:

Plan Net Annual Income

A $23,300
B $44,300

QUIZ 3 (2) – Thursday 1. A Three mutually exclusive alternatives are being considered.

Alternatif A B C
Initial investment 50000 15000 23000
Annual net income 5093 1643 2005
Computed rate of return 8% 9% 6%
Each alternative has a 20-year useful life with no salvage value. If the minimum attractive rate of return is 7%,
which alternative should be selected?

Alternatif A B C
Initial investment 5000 15000 2300
0 0
Annual net income 5093 1643 2005
Computed rate of return 8% 9% 6%
QUIZ 4 (1) – Thursday

1. Consider 3 alternatives, with interest rate 6%

Year A B C
0 - $90 - $100 - $120
1 20 0 0
2 20 10 0
3 20 20 0
4 20 30 0
5 20 40 0
6 20 50 180

a. Using future worth analysis, which of the above 3 alternatives is preferred?

b. Compute the payback period for alternative A and B! Which one is preferred between A and B?

c. Compute the benefit-cost ratio for alternative C, is alternative C recommended based on its B/C ratio?

QUIZ 4 (2) – Thursday

1. An investment of $200,000 is expected to generate the following cash inflows in six years:
Year 1: $70,000
Year 2: $60,000
Year 3: $55,000
Year 4: $40,000
Year 5: $30,000
Year 6: $25,000
Compute payback period of the investment. Should the investment be made if management wants to recover the
initial investment in 3 years or less?

2. A stretch of parkway in the downtown area of a city is located on a flood plain. Each spring, flooding occurs
which forces the closing of the parkway for several days, and the costs of inconvenience and longer travel times to
road users are estimated to be $100,000 per year. If a protective wall is built, the cost to road users will be reduced
to $70,000 per year. The wall is expected to have a 30 year life and cost $250,000 to construct. Every 4 years, an
additional $13,000 will be spent in maintenance around the wall. Use an interest rate of 8% per year compounded
monthly. What are the benefit/cost ratios for this project? Should the wall be built?
QUIZ REVIEW (A)

1. Strikler, Inc. has issued a $10 million, 10-year bond issue. The bonds require Strikler to establish a sinking fund
and make 10 equal, end-of-year deposits into the fund. These deposits will earn 8 percent annually, and the
sinking fund should have enough accumulated in it at the end of 10 years to retire the bonds. What are the annual
sinking fund payments?

2. When he purchased his home, Mr. Kim borrowed $80,000 at 10% interest to be repaid in 25 equal annual end-of-
year payments. After making 10 payments, Mr. Kim found he could refinance the balance due on his loan at 9%
interest for the remaining 15 years. To refinance the loan, Mr. Kim must pay the original lender the balance due on
the loan, plus a penalty charge of 2% of the balance due; to the new lender he also must pay a $1000 service
charge to obtain the loan. The new loan would be made equal to the balance due on the old loan, plus the 2%
penalty charge, and the $1000 service charge. Should Mr. Kim refinance the loan, assuming that he will keep the
house for the next 15 years? Use an annual cash flow analysis in working this problem. (n.b. balance due is the
amount of a debt still owed on an account or loan)

3. Consider four mutually exclusive alternatives:

A B C D
Cost, in dollar $75 $50 $15 90
Uniform annual benefit 18.8 13.9 4.5 23.8

Each alternativehas a 5-year useful life and no salvage value. The MARR is 10%. Which alternative should be
selected, based on
a. Benefit-cost ratio analysis

b. The payback period

4. Find the best alternative among the options below using incremental IRR:

A B C D
Initial cost $2000 $5000 4000 3000
Annual benefit 800 50 400 1300
Salvage value 200-0 1500 1400 3000
Life, in years 5 6 7 4
MAA required 6% 6% 6% 6%

QUIZ REVIEW (B)

1. Joe Ferro's uncle is going to give him $250 a month for the next two years starting today. If Joe deposits every
payment in an account paying a nominal annual interest rate of 6% compounded monthly, how much will he have
at the end of three years?

2. Two possible routes for a power line are under study. Data on the routes are as follows:

Around the Lake Under the Lake

Length 15 km 5 km
First cost $5000/km $25000/km
Maintenance $200/kmyr $400/kmyr
Useful life, in years 15 15
Salvage value $3000/km $5000/km
Yearly power loss $500/km $500/km
Annul property taxes 2% of first cost 2% of first cost
If 7% interest is used, should the power line be routed around the lake or under the lake? Use annual cash flow
analysis.
3. Three mutually exclusive alternatives are being considered:

A B C
Initial cost $500 $400 $300
Benefit at the end of the first year $200 $200 $200
Uniform benefit at the end of subsequent years $100 $125 $100
Useful life, in years 6 5 4
At the end of its useful life, an alternative is not replaced. If the MARR is 10%, which alternative should be
selected:
(a) Based on the payback period?

(b) Based on benefit-cost ratio analysis?

4. An investor purchased a one-acre lot on the outskirts of a city for $9000 cash. Each year he paid $80 of property
taxes. At the end of 4 years, he sold the lot. After deducting his selling expenses, the investor received $15,000.
What rate ofreturn did he receive on his investment?