1. A. Multiple Choice (20%) – Select the multiple choice answer closest to the correct
solution. Partial credit will be given for work provided.
1. Which of the following construction business types can have unlimited shareholders.
I.
II.
III.
IV.
S corporation
LLC
corporation
sole proprietorship
(A) II and III only
(B) I, II, and III
(C) I, III, and IV
(D) I, II, III, and IV
2. At 6% effective annual interest, approximately how much should be deposited at the start of
each year for ten years (a total of 10 deposits) in order to empty the fund by drawing out $200 at
the end of each year for ten years (a total of 10 withdrawals)?
(A) $190
(B) $210
(C) $220
(D) $250
3. At 6% effective annual interest, approximately how much will be accumulated in ten years if
three payments of $100 are deposited every other year for four years, with the first payment
occurring at t = 0?
5.
6.
7.
8.
(A)
(B)
(C)
(D)
$180
$480
$510
$540
4. A new machine will cost $17,000 and will have a resale value of $14,000 after five years.
Special tooling will cost $5,000. The tooling will have a resale value of $2,500 after five years.
Maintenance will be $2,000 per year. The effect annual interest rate is 6%. The average annual
cost of ownership during the next five years will be most nearly.
(A) $2,000
(B) $2,300
(C) $4,300
(D) $5,500
5. An old covered wooden bridge can be strengthened at a cost of $9,000, or it can be replaced
for $40,000. The present salvage value of the old bridge is $13,000. It is estimated that the
reinforced bridge will last for 20 years, will have an annual cost of $500, and will have a salvage
value of a new bridge after 25 years is $15,000. Maintenance for the new bridge would cost $100
annually. The effective annual interest rate is 8%. Which is the best alternative?
(A) Strengthen the old bridge
(B) Build the new bridge
(C) Both options are economically identical
(D) Not enough information is given
Equipment that is purchased for $12,000 now is expected to be sold after ten years for $2,000.
The estimated maintenance is $1,000 for the first year, but it is expected to increase $200 each
year thereafter. The effective annual interest rate is 10%.
6. The present worth is most nearly:
(A) $16,000
(B) $17,000
(C) $21,000
(D) $22,000
7. The annual cost is most nearly:
(A) $1,100
(B) $2,200
(C) $3,600
(D) $3,700
A transit district has asked for assistance in determining the proper fare for its bus system. An
effective annual interest rate of 7% is to be used. The following additional information was
compiled.
Cost per bus
Bus life
Salvage Value
Miles driven per year
Number of passengers
Operating cost
each year thereafter
$60,000
20 years
$10,000
37,440
80,000
$1.00 per mile in the first year, increasing $0.10 per mile after
8. If the fare is to remain constant for the next 20 years, the break-even fare per passenger is
most nearly:
(A) $0.51 per passenger
(B) $0.61 per passenger
(C) $0.84 per passenger
(D) $0.88 per passenger
9. If the transit district decides to set the per-passenger fare at $0.35 for the first year,
approximately how much should the passenger fare go up each year thereafter such that the
district can break even in 20 years?
(A) $0.022 increase per year
(B) $0.036 increase per year
(C) $0.067 increase per year
(D) $0.072 increase per year
10. If the transit district decides to set the per-passenger fare at $0.35 for the first year and the
per-passenger fare goes up $0.05 each year thereafter, the additional government subsidy (per
passenger) needed for the district to break even in 20 years is most nearly?
(A) $0.11
(B) $0.12
(C) $0.16
(D) $0.21
B. Hand Solution (50%) – Perform the following calculations by hand using either the
equations or factors from the Appendix:
11.Your current salary is $72,000 per year, and you are planning to retire in 25 years from now.
She anticipates that her salary will increase $3,000 each year, and she plans to deposit 5% of her
yearly salary into a retirement fund that earns 7% interest compounded daily. What will be the
amount of interest accumulated at the time of your retirement?
12. You have borrowed $51,000 from a bank at an interest rate of 9.5% compounded monthly.
The loan will be repaid in 36 equal monthly installments over 3 years. Immediately after his 20th
payment, you desire to pay the remainder of the loan in a single payment. Compute the total
amount he must pay.
13. Your R&D group has developed and tested a computer software package that helps engineers
control the proper chemical mix for various process-manufacturing industries. If you decide to
market the software, your first-year operating net cash flow is estimated to be $800,000.
Because of market competition, product life will be about four years, and the product’s market
share will decrease by 25% each year over the previous year’s share.
(A)To protect the erosion of the market share (to maintain $800,000 cash flow per year
prior to update costs), you need to upgrade the software the every year at the expense of $60,000.
Is it worth upgrading the software? Your interest rate is 15%.
(B) You are approached by a big software house which wants to purchase the right to
produce and distribute the software. For what minimum price would you be willing to sell the
software?
14. Covington Corporation purchased a vibratory finishing machine for $20,000 in year 0. The
useful life of the machine is 10 years, at the end of which the machine is estimated to have a
salvage value of zero dollars. The machine generates net annual revenue of $9,000. The annual
operating and maintenance expenses are estimated to be $1,500. If Covington’s MARR is 7.5%,
how many years will it take before this machine becomes profitable?
15. The city of Carlsbad in California is considering building a $300 million water-desalination
plant. The facility would be the largest in the Western Hemisphere, producing 50 million gallons
of drinking water a day – enough to supply about 100,000 homes. This plant, which uses
improved membranes and pumping system to bring down the energy cost to $0.90 in electricity
to produce 10,000 gallons of water. Suppose the desalination plant is fully operational and you
expect to operate it continuously for 50 years, with an estimated salvage value of $20 million.
The operating and maintenance costs (excluding energy cost) amount to $15 million the first year
and will increase at a rate of 3% per year. If the city plans to sells the water for about $925 per
acre-foot (an acre-foot is 325,851 gallons – enough water for four people per year.), can it
recover the capital cost and other operating costs? Assume the city’s interest rate for this water
project is known to be 6%.
C. Excel Solution (30%) – Perform the following calculations using excel:
16. You are considering a luxury apartment building project that requires an investment
of $10,500,000. The building has 50 units. You expect the maintenance cost for the
apartment building to be $350,000 the first year and $400,000 the second year. The
maintenance cost will continue to increase by $50,000 in subsequent years. The cost to
hire a manager for the building is estimated to be $85,000 per year. After five years of
operation, the apartment building can be sold for $12,000,000. The market research
shows that your units should be able to command is $3,000. Assume the building will
remain 90% occupied during its five years of operation. What is the rate of return that
this property can expect to earn?
17. You are considering purchasing a CNC machine which costs $180,000. This machine
will have an estimated service life of 10 years with a net after-tax salvage value of
$15,000. Its annual after-tax operating and maintenance costs are estimated to be
$50,000. To expect an 18% rate or return on investment, what would be the required
minimum annual after-tax revenues?
18. Apex Corporation requires a chemical finishing process for a product under contract
for a period of six years. Three options are available. Neither option 1 nor option 2 can be
repeated after its process life. However, option 3 will always be available from H&H
Chemical Corporation at the same cost during the period that the contract is operative.
Here are the operations:
•
•
Option 1: Process device A, which costs $100,000, has annual operating and labor
costs of $60,000 and a useful service life of four years with an estimated salvage
value of $10,000.
Option 2: Process device B, which costs $150,000, has annual operating and labor
costs of $50,000 and a useful service life of six years with an estimated salvage of
$30,000.
•
Option 3: Subcontract out the process at a cost of $100,000 per year.
According to annual equivalent worth criterion, which option would you
recommend at i = 12%.
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