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School of Engineering – Industrial Engineering Department

ES ECON : PRE-MIDTERM TTH 0600-0730PM
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TEST PAPER

1. Problem must be understood and stated in an explicit form before the project team process with
the rest of the analysis.
a. Development of feasible alternatives
b. Development of cash flow for each alternative.
c. Problem definition, formulation and evaluation
d. Analysis and comparison of alternatives

2. The prevailing rate of interest offered on cash deposits, determined by demand and supply of
deposits and based on the duration (the longer the duration, the higher the rate) and amount (the
higher the amount, the higher the rate) of deposits.

a. Rate of interest c. Effective Rate of Interest

b. Currency Value d. Market Interest Rate

3. Quantitative measure of the rate at which the average price level of a basket of selected goods
and services in an economy increases over a period of time. It is the constant rise in the general
level of prices where a unit of currency buys less than it did in prior periods

a. Discount c. Interest Rate

b. Inflation d. Market Interest Rate

4. Consumer usually have a relative and imprecise sense of how their purchasing power is declining
based on their experience of shopping for food, clothing, transportation, and housing over the
years.

a. CPI c. Interest
b. PPI d. Inflation

5. Which is not a Major Market Basket

a. Food and Alcoholic Beverage c. Other Goods

b. Entertainment d. Raw Materials

6. What is the amount of interest earned on $2,000 for five years at 10% simple interest per year?

a. $3,000 c. $1,000
b. $2,000 d. $1,500

7. You are about to borrow $3,000 from a bank at an interest rate of 9% compounded annually. You
are required to make three equal annual repayments in the amount of $1,185.16 per year, with
the first repayment occurring at the end of year one. What is the interest amount paid on the first
year?

a. $270 c. $97.83
b. $290 d. $997.68
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School of Engineering – Industrial Engineering Department
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8. You are about to borrow $3,000 from a bank at an interest rate of 9% compounded annually. You
are required to make three equal annual repayments in the amount of $1,185.16 per year, with
the first repayment occurring at the end of year one. What is the amount paid on the third year?

a. $1,185.16 c. $1,087.32
b. $915.16 d. $997.52

9. Suppose that, to cover some of your college expenses, you are obtaining a personal loan form
your uncle in the amount of $10,000(now) to be repaid in two years. If your uncle always earns
10% interest (compounded quarterly) on his money invested in various sources, what minimum
lump-sum payment two years from now would make your uncle happy economically?

a. $12,100 c. $12,184
b. $12,000 d. $12,150

10. Assuming an interest rate of 8% compounded annually, How much money will be required in four
years in order to repay a $15,000 loan borrowed now?

a. $20,407.33 c. $11,025.45
b. $20,407.34 d. $11,025.44

11. A local newspaper headline blared, “Bo Smith Signs for $30 Million.” The article revealed that, on
April 1, 2002, Bo Smith, the former record-breaking running back from Football University, signed
a $30 million package with the Nebraska Lions. The terms of the contract were $3 million
immediately, $2.4 million per year for the first five years (with the first payment after one year),
and $3 million per year for the next five years (with the first payment at the end of year six). If the
interest rate is 8% compounded annually, what is Bo’s contract worth at the time of contract
signing?

a. $20,734,600.00 c. $20,734,774.86
b. $20,734,618.17 d. $20,734,800.00

12. A deposit of P 110,000 was made for 31 days. The net interest after deducting 20% withholding
tax is P 890.36. Find the rate of return annually.

a. 11.50% c. 11.95%
b. 11.75% d. 12.32%

13. What nominal rate compounded annually would quadruple the principal in 4 years?

a. 41.42% c. 41.79%
b. 40.81% d. 40.45%

14. Cessna borrowed a certain amount from Diane on June 1990. Two years later, Julie again
borrowed P 5,000. Julie decided to pay P 1,000 on June 1993 and discharged her balance by
paying P 7,500 on June 1995. What was the amount borrowed on June 1990 if the interest rate
is 8% compounded annually?
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School of Engineering – Industrial Engineering Department
ES ECON : PRE-MIDTERM TTH 0600-0730PM
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a. P 1,389.50 c. P 1, 611.51
b. P 1, 564.20 d. P 1,742.30

15. Viente invests P100,000 today to be repaid in five years in one lump sum at 12% compounded
annually. If the rate of inflation is 4% compounded annually, how much profit, in today’s pesos, is
realized over the five-year period?

a. P 43,125.64 c. P 44,987.60
b. P 44,851.64 d. P 45, 673.12

16. A debt of 12,000 with interest of 20% compounded quarterly is to be amortized by equal semi-
annual payments over the next 3 years. How much is the semi-annual payments? Note: The first
payment is due in 6 months.
a. P 2,000.00 c. P 2,775.50
b. P 2,431.12 d. P 3,456.78

17. A house costs P400,000 cash. A purchaser will pay it through the following:
- P90,000 cash,
- P60,000 at the end of 2 years, and
- 6 equal annual payments starting with one at the end of 4 years
Find the annual payment which must be made for 6 years to discharge all his liabilities to the
principal and interest (interest rate at 7% compounded annually).
a. P 60,003.21 c. P 63,065.43
b. P 62,332.12 d. P 66,204.14

18. You want to buy a car, and a local bank will lend you $20,000. The loan would be fully amortized
over 5 years (60 months), and the nominal interest rate would be 12% with interest paid monthly.
What is the monthly loan payment?

a. $244.89 c. $444.89
b. $344.89 d. $544.89

19. Which of the following cash stream is more advantageous (Hint: Bigger value for the Net Present
Value)? Interest Rate is 8% annually.

a. Cash Stream A
b. Cash Stream B
c. Both Cash Streams have equal values
d. Cannot be determined due to lacking information

20. Anizoba, manager of Oaks Mall Jewelry, wants to sell on credit, giving customers 3 months to
pay. However, Anne will have to borrow from her bank to carry the accounts receivable. The bank
will charge a nominal rate of 15% and will compound monthly. Anne wants to quote a nominal
rate to her customers (all of whom are expected to pay on time) that will exactly offset her
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School of Engineering – Industrial Engineering Department
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financing costs. What nominal rate (compounded quarterly) should she quote to her credit
customers?

a. 14.22% c. 16.08%
b. 15.19% d. 16.15%

21. Universal Bank pays 7% interest, compounded annually, on time deposits. Regional Bank pays
6% interest, compounded quarterly. Based on effective interest rates, in which bank would you
prefer to deposit your money?
a. Invest in Universal Bank since the interest rate is higher
b. Invest in Regional Bank since the interest rate is higher
c. Both banks provide equal returns, thus, could invest in either banks
d. No decision can be made due to lacking information

22. What is the future value of a 7%, 5-year annuity that pays $300 each year? Consider this as an
annuity due (i.e. payments are made at the start of the year).

a. $1,725.22 c. $1,900.00
b. $1,845.99 d. $1,933.47

23. Which of the statements below describes the functions of money?

I - As a medium of exchange
II - As a unit of account.
III - As a store of value.
a. Statements I, II, and III c. Statements I and III only
b. Statements I and II only d. Statements II and III only

24. Okay wants to invest a sum of P50,000 in two investments. The first investment earns a rate of
interest 4 times that of the second investment. In 3 years the first investment grows to P37,200.
For 10 years, the second investment grows to P24,000. Consider this as Simple Interest
Investment. Find the rate of interest of each
a. 8% and 2% c. 7% and 3%
b. 6% and 4% d. 5% and 1%

25. A debt of 10,000 with 10% interest compounded semi-annually is to be amortized by semi-annual
payment over the next 5 years. The first due in 6 months. Determine the annual payment.
a. 1,295.05 c. 1,312.52
b. 1,340.00 d. 1,400.00

26. If 10,000 is deposited each year for 9 years, how much annuity can a person get annually from
the bank every year for 8 years starting 1 year after the 9th deposit is made. Cost of money is
14%.
a. 25,865.79 c. 34,143,99
b. 33,000.25 d. 34,675.18

27. A company has approved a car plan for its six senior officers in which the company will shoulder
25% of the cost, and the rest is to be paid by each of the officer. This will be paid to a financing
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School of Engineering – Industrial Engineering Department
ES ECON : PRE-MIDTERM TTH 0600-0730PM
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company in 48 equal end-of-month installments at an interest rate of 1.5% per month. If the cost
of each car is P350,000, determine the payable for each officer?
a. 6,443.23 c. 7,824.32
b. 7,710.94 d. 8,100.68

28. The maintenance on a machine is expected to be P155 at the end of the first year, and increasing
P35 each year for the following 7 years. What present sum of money would you need to set aside
to pay the maintenance for the whole 8-year period? Assume 6% interest.
a. 1,500.33 c. 1,883.22
b. 1,656,99 d. 1,903.25

29. A piece of machinery can be bought for P10,000 cash, or could be paid through the following:
P2,000 downpayment and with payments of P750 per year for 15 years. What is the annual rate
of interest for the time payments?
a. 3.64% c. 4.48%
b. 3.87% d. 4.61%

30. Mr. Fernandez borrows P100,000 at 10% effective annual interest. She must pay back the loan
over 30 years with uniform monthly payments due on the first day of each month. How much
does she pay per month?
a. P 765.79 c. P 844.32
b. P 839.19 d. P 921.32

31. Mr. Managor deposits her annual bonus into a savings account that pays 6% interest
compounded annually. The size of the bonus increases by $1,000 each year, and the initial
bonus amount is $3,000. Determine how much will be in the account immediately after the fifth
deposit

a. $27,529.50 c. $27,529.49
b. $27,592.50 d. $27,592.49

32. Five annual deposits in the amounts of $1,200, $1,000, $800, $600, and $400 are made into a
fund that pays interest at a rate of 9% compounded annually. Determine the amount in the fund
immediately after the fifth deposit.

a. $4,993.40 c. $4,990.40
b. $4,992.50 d. $4,998.50

33. Compute the value of P for the accompanying cash flow diagram. Assume i = 8%.

a. $1,650.19 b. $1,680.91
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School of Engineering – Industrial Engineering Department
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c. $1,651.19 d. $1,660.29

34. What is the equal-payment series for 10 years that is equivalent to a payment series starting with
$12,000 at the end of the first year and decreasing by $1,000 each year over 10 years? Interest is
8% compounded annually.

a. $9,219 c. $8,128
b. $8,117 d. $8,129

35. Consider the cash flow series given in the accompanying table. Which of the following values of C
makes the deposit series equivalent to the withdrawal series at an interest rate of 12%
compounded annually at the end of period 4?

a. C = $200.00 c. C = $394.65
b. C = $282.70 d. C = $458.90

36. Suppose that an oil well is expected to produce 100,000 barrels of oil during its first production
year. However, its subsequent production (yield) is expected to decrease by 10% over the
previous year’s production. The oil well has a proven reserve of 1,000,000 barrels. Suppose that
the price of oil is expected to be $30 per barrel for the next several years. What would be the
present worth of the anticipated revenue stream at an interest rate of 12% compounded annually
over the next seven years?

a. $10,686,001 c. $11,923,948
b. $10,686,038 d. $7,134,826

37. Suppose that an oil well is expected to produce 100,000 barrels of oil during its first production
year. However, its subsequent production (yield) is expected to decrease by 10% over the
previous year’s production. The oil well has a proven reserve of 1,000,000 barrels. Suppose that
the price of oil is expected to start at $30 per barrel during the first year, but to increase at the
rate of 5% over the previous year’s price. What would be the present worth of the anticipated
revenue stream at an interest rate of 12% compounded annually over the next seven years?

a. $10,686,001 c. $11,923,948
b. $10,686,038 d. $7,134,826
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School of Engineering – Industrial Engineering Department
ES ECON : PRE-MIDTERM TTH 0600-0730PM
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38. Find the equivalent equal-payment series C, using an A/G factor, such that the two
accompanying cash flow diagrams are equivalent at 10% compounded annually.

a. $90.26 c. $92.26
b. $91.26 d. $93.26

39. Consider the following cash flow: In computing F at the end of year 5 at an interest rate of 12%
compounded annually, which of the following statements is incorrect?

a. F = $1,000(F/A, 12%, 5) - $500(F/P, 12%, 5)

b. F = $500(F/A, 12%, 6) + $500(F/A, 12%, 5)
c. F = [$500 + $1,000(P/A, 12%, 5)] (F/P, 12%, 5)
d. F = [$500(A/P, 12%, 5) + $1,000] (F/A, 12%, 5)

40. A local newspaper headline blared, “Bo Smith Signs for $30 Million.” The article revealed that, on
April 1, 2002, Bo Smith, the former record-breaking running back from Football University, signed
a $30 million package with the Nebraska Lions. The terms of the contract were $3 million
immediately, $2.4 million per year for the first five years (with the first payment after one year),
and $3 million per year for the next five years (with the first payment at the end of year six). If the
interest rate is 8% compounded annually, what is Bo’s contract worth at the end of 10 years?

a. $44,764,485.49
b. $44,764,446.25
c. $44,764,823.76
d. $44,764,878.03