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# Mid-term exam: March 5, 2014. ED72.

13

##  The number in parentheses represents the allocated weight of the question.

 This exam makes 30% of total score

1. (2) What are the key features of the energy projects that make them unique from other
projects?
OR

(2) Describe the stages through which a typical energy project goes through. What are the
importance of each of those stages?

## 2. (1) Differentiate between marginal and average costs.

3. (1) What do we mean by “time value of money”? What are the two factors that determine
the time value of money and explain why?

4. (3) Airplane ticket price to your home will increase 8% in each of the next four years. The
cost at the end of the first year will be \$180.
a. How much you should put away now to cover your travel home at the end of each
year for the next four years? Assume 5% interest rate.
b. Draw also the cash flow diagram
c. What would be the future-worth of your cash flow in (a)?

5. (2) Describe the difference between “independent projects” and “mutually exclusive
projects”. In what ways the project selection criteria differs between them?

6. (1) What are the key limitations of “payback period method” for project selection?

7. (2) For a project A, the cash flows are shown below. Calculate the “discounted payback
period” with a 5% discount rate.
Projects A
Cost \$10,000
Cash Flow Year One \$4,000
Cash Flow Year Two \$4,000
Cash Flow Year Three \$4,000
Cash Flow Year Four \$4,000
Cash Flow year Five \$4,000
Cash Flow Year Six \$4,000
8. (1) Describe the difference between MARR (Minimum Attractive Rate of Return) and IRR
(Internal Return of Return).
9. (3) Assume a company wants to decide whether to purchase a piece of factory equipment
for \$300,000. The equipment would only last three years, but it is expected to generate
\$150,000 of additional annual profit during those years. Company also thinks it can sell
the equipment for scrap afterward for about \$10,000. Determine if the Company should
purchase the equipment than its other investment options which should return about
10%. What is Internal rate of Return (IRR) of this investment.
10. (4)For a bridge constriction project, the initial construction cost is \$2,000,000. The bridge
requires annual maintenance cost of \$50,000. In addition, every 15 years, the major
renovation is needed that costs \$500,000. The project runs for infinite years. At the
interest rate of 5% what would be the total present-worth of this cash-flow?
11. (2) A company has contractual obligation to supply electricity for 10 years. The company
is considering three mutually exclusive projects out of which first project’s project life is
10 years, second 6 years and third 12 years.
a. Describe basic appraoch (what needs to be considered) to compare these project
from present-worth criterion?
b. If the company’s ‘required-service-period’ is not given, how to compare these
projects?
OR
(2) How Annual Equivalent-Worth Criterion (AE) differs from Present-Worth (PW)
Criterion and in which situation AE method is better to use compared to PW method.

## 12. (3) Consider the following cash flow:

Year \$
0 -10,000
1 5,000
2 -2,000
3 8,000
Do you categorize above investment as simple or non-simple investment?
How many Rate-Of-Returns (RORs) can we expect from examining this cash flows?
Does this investment has a unique positive rate of return?
13. (2) What are the major differences between economic and accounting depreciation?
OR
(2) What are the differences between ‘book’ and ‘tax’ depreciation?

14. (3) Calculate annual depreciation allowance and book value of asset for each year.
Cost of asset = \$100,000
Estimated residual value = \$10,000
Estimated useful life of asset = 5 years
Depreciation rate = Double Depreciation Balance (DDB)