ENGR 301 Section G: Engineering Management Principles and Economics

Sample Mid-Term Exam, Fall 2008

Instructions:
1. This is a close book exam. Maximum grade is 30 points.
2. A multiple choice question has only one correct answer.
3. Do NOT provide solution process for multiple choice questions in the answer booklet.
4. Exam question sheets are to be returned together with the answer booklet.
5. Answer all the questions on the answer booklet.

1. (3 points) An account pays simple interest of 2% per quarter. If $100 is deposited at time 0, how
much is in the account after one year?
(a) $102 (b) $104 (c) $106 (d) $108

2. (3 points) You want to find the equivalent present worth for the following cash flow series at an
interest rate of 15%. Which of the following statement is NOT correct?

Questions 3 to 4
$2,000 is borrowed at the beginning of a year, and will be paid off with 12 equal monthly payments,
$A each, with the first payment made at the end of month 1. The interest rate is 12% compounded
monthly.

3. (3 points) What is the remaining balance of the loan right after the 8th payment?
(a) 4*A
(b) A*(P/A, 1%, 4)
(c) A*(P/A, 1%, 4) (P/F, 1%, 8)
(d) A+A*(P/A, 1%, 4)

4. (3 points) If quarterly payments are to be made, what is the interest rate per payment period?

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(a) 3.00% (b) 4.00% (c) 3.03% (d) 4.04%

5. (3 points) A firm plans to manufacture a certain product for the next ten years. Two alternative
machines are available: A with life of 4 years, and B with life of 5 years. When comparing these two
machines, which should be used as the analysis period?
(a) 5 years (b) 10 years (c) 20 years (d) infinite period

6. (3 points) Comparing the following two investment alternatives (10% interest rate)

n A B
0 -1000 -3000
1 500 1200
2 500 1200
3 500 1200

The IRR of the incremental investment falls into the following range:
(a) < 5% (b) 5%-10% (c) 10%-20% (d) >20%

7. (12 points)
A machinery firm is considering investing in a new production line. The required equipments would
cost $600,000. The building would cost $1,200,000, and the land would cost $200,000. The project
life is 4 years. The new production line is expected to result in additional revenues of $900,000 per
year, and additional operating costs of $250,000 per year. At the end of the project, the equipments
can be sold for $200,000, the building for $600,000, and the land for $300,000.
The equipments are classified as class 43 property with CCA rate 30%. The CCA rate for the
building is 4%. The firms income tax rate is 40%. The capital gain tax rate is 20%. The firms
minimum attractive rate of return is 17%. 40% of the required initial investment is financed with a
term loan with 12% interest rate.
(a) What is the total amount of the term loan?
(b) Calculate the principal and interest payments of the term loan over the project life.
(c) Calculate the CCA values for the equipment over the project life.

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