Test Bank Engineering Economics Financial Decision Making for Engineers 5th Edition by Niall M. Fraser

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Engineering Economics, 5e (Fraser)

Chapter 1   Engineering Decision Making

 

1.1   Multiple Choice Questions

 

1) Evaluation of an engineering project involves the following constraints:

1. A) financial, environmental, social and political constraints.
2. B) technical and financial constraints.
3. C) technological and social constraints.
4. D) time and money constraints.
5. E) budget and time constraints.

Answer:  A

Diff: 1    Type: MC     Page Ref: 3

Topic:  1.1. Engineering decision making

Skill:  Recall

User1:  Qualitative

 

2) Engineering economics is

1. A) a body of knowledge to determine which of several alternative is technically best.
2. B) a collection of techniques for quantitative analysis to select a preferable alternative from several technically viable ones.
3. C) a set of tools to calculate an engineering project’s costs.
4. D) a set of rules to evaluate an engineering project.
5. E) a set of methods to determine an engineering project’s costs in terms of time value of money.

Answer:  B

Diff: 1    Type: MC     Page Ref: 3

Topic:  1.2. What is engineering economics

Skill:  Recall

User1:  Qualitative

 

3) From an economic standpoint, any engineering project can be thought of in terms of

1. A) its costs and benefits over time.
2. B) its constraints.
3. C) its receipts and disbursements.
4. D) its revenues and profits over time.
5. E) its investment and costs over time.

Answer:  A

Diff: 1    Type: MC     Page Ref: 3

Topic:  1.2. What is engineering economics

Skill:  Recall

User1:  Qualitative

 

 

4) In the context of your textbook, abstraction means

1. A) a study.
2. B) a method
3. C) a methodology
4. D) a model.
5. E) an approach

Answer:  D

Diff: 1    Type: MC     Page Ref: 6

Topic:  1.4. Dealing with abstractions

Skill:  Recall

User1:  Qualitative

 

5) When an engineer prepares a feasibility study, what economic information must she possess in order to do it correctly?

1. A) engineering specification
2. B) expert opinion about this project
3. C) macroeconomic situation in the world
4. D) potential future costs and benefits of the project
5. E) the level of uncertainty

Answer:  D

Diff: 2    Type: MC     Page Ref: 6

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Qualitative

 

6) In which of the following problems do you need engineering economics?

1. A) to choose a course in your program
2. B) to chose the right textbook
3. C) to decide whether to borrow money from parents or from a bank
4. D) to decide whether or not to buy a car
5. E) to decide where to spend summer vacation

Answer:  C

Diff: 2    Type: MC     Page Ref: 6-8

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Qualitative

 

7) Which of the following statements best describes the moral issues faced by engineers while evaluating projects?

1. A) moral issues are clearly defined in engineering design
2. B) moral issues do not matter as long as technical goals are achieved
3. C) your employer is the only person who can define what is ethical or unethical
4. D) there are no general answers to moral questions
5. E) since moral issues are value judgements they must not be taken into consideration

Answer:  D

Diff: 3    Type: MC     Page Ref: 9-10

Topic:  1.5. The moral question: Three true stories

Skill:  Applied

User1:  Qualitative

 

8) The best way to find some answers to difficult moral questions in engineering design and project evaluation is

1. A) to ask your friends.
2. B) to consult professional engineering associations.
3. C) to search the web.
4. D) to read newspapers.
5. E) to read professional textbooks.

Answer:  B

Diff: 2    Type: MC     Page Ref: 9-10

Topic:  1.5. The moral question: Three true stories

Skill:  Recall

User1:  Qualitative

 

9) Stan borrowed $5 000 one year ago. Now he has to repay $5 100. The interest Stan pays is

1. A) $5 100
2. B) 102%
3. C) $100
4. D) 2%
5. E) $5 000

Answer:  C

Diff: 2    Type: MC     Page Ref: 6-8

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Quantitative

 

10) Joan borrowed $1 000 one year ago. Now she has to repay $1 100. Therefore, the interest rate she pays is

1. A) $1 000
2. B) $1 100
3. C) $100
4. D) 110%
5. E) 10%

Answer:  E

Diff: 2    Type: MC     Page Ref: 6-8

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Quantitative

 

11) All but one of the following are economic criteria to evaluate an engineering project. Which one is the non-economic criterion?

1. A) maximum profit
2. B) minimum cost
3. C) minimum pollution
4. D) maximum rate of return
5. E) minimum payback period

Answer:  C

Diff: 2    Type: MC     Page Ref: 2-6

Topic:  1.2. What is engineering economics

Skill:  Applied

User1:  Qualitative

 

12) Analyze the following statement: “There is 50% probability of raining”. This statement concerns

1. A) extrapolation.
2. B) risk.
3. C) precise description.
4. D) abstraction.
5. E) expected scenario.

Answer:  B

Diff: 2    Type: MC     Page Ref: 11

Topic:  1.6. Uncertainty, sensitivity analysis, and currencies

Skill:  Applied

User1:  Qualitative

 

13) To resolve uncertainty, engineers apply

1. A) marginal analysis.
2. B) cash-flow analysis.
3. C) sensitivity analysis.
4. D) risk analysis.
5. E) economic impact analysis.

Answer:  C

Diff: 2    Type: MC     Page Ref: 11

Topic:  1.6. Uncertainty, sensitivity analysis, and currencies

Skill:  Recall

User1:  Qualitative

 

14) If you are asked to choose between $100 today and $150 one year from now, you are being asked to

1. A) make a guess.
2. B) reveal your implied interest rate.
3. C) compare two values which are not comparable in principle.
4. D) reveal your private financial information.
5. E) make a choice under uncertainty.

Answer:  B

Diff: 3    Type: MC     Page Ref: 6-8

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Qualitative

 

15) Which of the following items has negligible maintenance costs?

1. A) computer
2. B) building
3. C) ruler
4. D) shoes
5. E) fur hat

Answer:  C

Diff: 2    Type: MC     Page Ref: 6-8

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Qualitative

 

 

16) You decide to buy a car. The following are some questions you have to answer with respect to your purchase. Which question is directly associated with engineering economics?

1. A) what colour?
2. B) what size?
3. C) CD player or tape player?
4. D) to lease or to own?
5. E) Ford or Toyota?

Answer:  D

Diff: 2    Type: MC     Page Ref: 3

Topic:  1.3. Making decisions

Skill:  Applied

User1:  Qualitative

 

17) Susan is evaluating an engineering project. She assumes zero inflation for the duration of the project. With respect to this situation, which statement is consistent with the subject matter of engineering economics?

1. A) A zero inflation assumption is always a good one.
2. B) A zero inflation assumption is not realistic but it is better than assuming some uncertain inflation rate.
3. C) A zero assumption is not a bad one for the base case, but then the project should be evaluated under different values in some range to see how inflation affects the project.
4. D) Since in Canada inflation is low, it is possible to neglect it.
5. E) The highest historical inflation rate must be chosen instead.

Answer:  C

Diff: 3    Type: MC     Page Ref: 3-6

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Qualitative

 

18) An owner of a small company is deciding to sell her business. She received several options specified bellow. Which one should the company’s owner accept?

1. A) $600 000 in cash
2. B) $500 000 in government bonds earning a 5% rate of return over 10 years
3. C) $400 000 in securities earning an 8% rate of return over 8 years
4. D) 15% of the future profits earned by the next owner during first 10 years
5. E) it is impossible to compare these offers due to uncertainty about basic economic variables over time

Answer:  E

Diff: 3    Type: MC     Page Ref: 3-6

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Quantitative

 

 

19) Suppose that you are asked to evaluate a project of building a new bridge. Which of the following factors is the least important in terms of engineering economics?

1. A) service life of the bridge
2. B) value added by the bridge
3. C) cost structure
4. D) vehicle stock in your city
5. E) current interest rate

Answer:  D

Diff: 3    Type: MC     Page Ref: 3-6

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Qualitative

 

20) Based on your intuition and experience, which of the following options has the highest value?

1. A) $100 government bond earning a 5% annual rate of return
2. B) $100 invested in a fund with a 10% annual rate of return
3. C) $200 government bond earning a 5% annual rate of return
4. D) $200 invested in a fund earning a 10% annual rate of return
5. E) $150 invested in a fund earning a 7% annual rate of return

Answer:  D

Diff: 2    Type: MC     Page Ref: 6-8

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Quantitative

 

21) Engineering economics is important because

1. A) it is a natural science.
2. B) it provides answers to all financial questions.
3. C) it facilitates the establishment of verifiable facts about decisions.
4. D) it uses mathematical models to address engineering issues.
5. E) it is based on objective laws.

Answer:  C

Diff: 2    Type: MC     Page Ref: 4

Topic:  1.2. What is engineering economics

Skill:  Recall

User1:  Qualitative

 

22) What is the best way to describe a mathematical model?

1. A) It is an exact copy of the real world.
2. B) It is a simplification to describe the real world in a reasonable way.
3. C) It is a set of mathematical relationships with assumptions based on natural laws.
4. D) It is a relationship that includes all aspects of a modelling situation.
5. E) It describes all complex processes that occur in the real world.

Answer:  B

Diff: 2    Type: MC     Page Ref: 6

Topic:  1.4. Dealing with abstractions

Skill:  Recall

User1:  Qualitative

 

 

23) In engineering economics, sensitivity analysis

1. A) addresses risk in engineering projects.
2. B) addresses inflation in a country.
3. C) involves random variables with their probabilities.
4. D) assesses the effect of uncertainty on a decision.
5. E) involves cash flows that are known with certainty.

Answer:  D

Diff: 3    Type: MC     Page Ref: 11-12

Topic:  1.6. Uncertainty, sensitivity analysis, and currencies

Skill:  Recall

User1:  Qualitative

 

24) Most of the economic values we use in our evaluation of engineering projects are

1. A) precise and very descriptive.
2. B) approximate.
3. C) based on robust statistical estimation.
4. D) derived from natural experiments.
5. E) results of precise statistical surveys.

Answer:  B

Diff: 2    Type: MC     Page Ref: 11

Topic:  1.6. Uncertainty, sensitivity analysis, and currencies

Skill:  Recall

User1:  Qualitative

 

25) When we say “let us assume that economic agents are rational”, in fact we

1. A) precisely describe behaviour of economic agents.
2. B) want economic agents to behave that way.
3. C) make an assumption to predict the agents’ behaviour.
4. D) impose restrictions on our model.
5. E) introduce uncertainty into our modelling process.

Answer:  C

Diff: 3    Type: MC     Page Ref: 6

Topic:  1.3. Making decisions

Skill:  Applied

User1:  Qualitative

 

1.2   Short Answer Questions

 

1) What is the subject matter of Engineering Economics?

Answer:  Engineering economics deals with techniques of quantitative analysis useful for selecting a preferable alternative from several technically viable ones. Its major objective is to allow an engineer to determine which of several alternatives is economically best.

Diff: 1    Type: SA     Page Ref: 3

Topic:  1.2. What is engineering economics

Skill:  Recall

User1:  Qualitative

 

 

2) Briefly describe the structure of a decision-making process as discussed in your textbook.

Answer:  The textbook presents this structure in a form of a pyramid. At the top of the pyramid are preferences, which directly control the choices made. The next tier is composed of people and politics. Politics means the use of power in organizations. The next tier is a collection of facts. The facts, which may not be verifiable, contribute to the politics and people, and indirectly to the preferences. At the bottom of the pyramid are the activities that contribute to the facts. These include the history of previous similar decisions, statistics of various sorts, and a determination of costs.

Diff: 2    Type: SA     Page Ref: 4-5

Topic:  1.3. Making decisions

Skill:  Recall

User1:  Qualitative

 

3) Explain the role of a mathematical model in engineering economics.

Answer:  When one describes something, one does so for a purpose. In the description, one selects aspects of the real world that are relevant to that purpose. The process of simplifying the complexities of the real world is necessary for any engineering analysis. This process of simplification is called abstraction or a model. Once a model is developed, it is used to analyze a situation, and perhaps make some predictions about the real world. The analysis and the predictions are then related back to the real world to make sure that the model is valid. The role of abstractions is to develop a viable mode of the real world.

Diff: 2    Type: SA     Page Ref: 6

Topic:  1.4. Dealing with abstractions

Skill:  Recall

User1:  Qualitative

 

4) How should engineers address moral questions associated with economic evaluation of engineering projects?

Answer:  Engineers have a responsibility to society to behave ethically and responsibly in all ways. When many different issues must be taken into account in engineering decision making, it is often difficult to determine what course of action is ethical. There are no general answers to difficult moral questions. Practicing engineers often have to make choices with an ethical component, and can sometimes rely on no stronger foundation than their own sense of right and wrong. More information about ethical issues for engineers can be obtained from provincial professional engineering organizations.

Diff: 1    Type: SA     Page Ref: 8-10

Topic:  1.5. The moral question: Three true stories

Skill:  Recall

User1:  Qualitative

 

 

5) Suppose that you are about to start a new business: You will provide consulting services for those who want to launch their own web-sites. What major decisions based on the subject matter of engineering economics should be made before you set up your business activities?

Answer:  You have to evaluate the expected future costs and benefits of your enterprise. In doing so, you have to understand your final product and identify a market for that product. As a result, you will be able to evaluate your expected revenues.  This is known as demand-side analysis. On the supply side, you have to understand all materials, efforts and services involved in producing and/or providing your product. This will give you a cost structure. Then you have to define your planning horizon in order to use economic forecasts of major macroeconomic variables such as interest rate, inflation and others. You have to understand the Canadian tax system as well. If you are uncertain about values of some variables involved, you have to use principles of sensitivity analysis. All this is the subject matter of engineering economics.

Diff: 3    Type: SA     Page Ref: 3-5, 11

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Qualitative

 

6) As a University student, when you look for a new apartment, what economic criteria consistent with the subject matter of engineering economics do you apply?

Answer:  You have to understand your budget in terms of cash inflows and outflows. Cash inflows may include: a fellowship, a grant, a loan, an allowance provided by parents and others. Cash outflows to consider are: costs of utilities, transportation cost, cost of textbooks, tuition fee, food expenses, and others. As well, time should be explicitly introduced into your economic analysis.  Therefore, for example, a more expensive apartment closer to the University can be preferred to a cheaper one far away, based on transportation costs.

Diff: 2    Type: SA     Page Ref: 3-5

Topic:  1.3. Making decisions

Skill:  Applied

User1:  Qualitative

 

7) Suppose that in order to finance your studies at the University, three options are available to you: (i) a student loan, (ii) a student line of credit, and (iii) a part-time job at minimum wage. In making your decision, what factors should be taken into account and why?

Answer:  Both a student loan and a student line of credit represent borrowing. There are costs associated with borrowing and it is necessary to compare them. In general, a student loan is interest-free as long as you stay in school, while a student line of credit is not interest-free. It means that the costs of borrowing associated with a student loan are lower. Of course, earning your own money is a good option since you avoid paying costs of borrowing. On the other hand, if you work you forgo opportunity to spend this time on your studies. There are some costs associated with that opportunity, called opportunity costs. If the opportunity costs of working exceed the costs of borrowing under student loan, then the latter is the best option. Otherwise, working is a better option.

Diff: 3    Type: SA     Page Ref: 3-7

Topic:  1.3. Making decisions

Skill:  Applied

User1:  Qualitative

 

 

8) List at least three non-economic factors (attributes) that may be used as evaluation criteria in the decision-making process.

Answer:  Non-economic factors are mainly associated with social, environmental and political constraints. Examples are:

–  Results of new elections;

–  Introduction of a new welfare program;

–  Introduction of new environmental standards.

Diff: 1    Type: SA     Page Ref: 4-6

Topic:  1.3. Making decisions

Skill:  Applied

User1:  Qualitative

 

9) When evaluating an engineering project, what types of constraints does a decision maker face?

Answer:  A project might be technically feasible and the cheapest solution to a problem, but if it doesn’t earn money at the minimum rate required by the company, it should not be done. The decision maker therefore has to be aware of the financial constraints on the problem. In addition, an engineering project can meet all other criteria, but may cause detrimental environmental effects, so we must also consider environmental constraints. Finally, any project can be affected by social and political constraints.

Diff: 2    Type: SA     Page Ref: 3-6

Topic:  1.3. Making decisions

Skill:  Recall

User1:  Qualitative

 

10) Every year Stan takes a Canada student loan of $5 000 to pay his tuition fees at the University. The loan is interest-free for as long as Stan is a full-time student. After graduation, he will have to start re-paying the loan within 6 months including interest. Is this a good decision? Why?

Answer:  Yes, this is a good decision. Stan can borrow $20 000 for four years or $25 000 for five years for free. If this money were invested in a mutual fund or in financial securities, it would earn some return. Or if Stan borrowed the money from a commercial bank, he would pay interest payments to service his debt. Student loan has no borrowing costs.

Diff: 2    Type: SA     Page Ref: 3-6

Topic:  1.3. Making decisions

Skill:  Applied

User1:  Quantitative

 

11) If you decide to buy a home, list basic economic and non-economic factors you have to take into account and rank them

Answer:  You need to know the price of a home, current mortgage rate,potential duration of the mortgage and your own current and expected income. Those are fundamental economic factors. Non-economic factors may include: location, environmental quality, and safety.

Diff: 2    Type: SA     Page Ref: 3-6, 11

Topic:  1.6. Uncertainty, sensitivity analysis, and currencies

Skill:  Applied

User1:  Qualitative

 

 

12) Suppose that a local government decides to build a bridge. In order to justify this project, economists want to ask people directly about their willingness to pay for the bridge. Using the discussion in your textbook, list at least three problems with this economic measure.

Answer:  The following three problems can be mentioned in this regard: (i) willingness to pay for a non-market good is very difficult to define; (ii) willingness to pay for non-market good is very subjective measure; (ii) it will require a lot of data and comprehensive statistical analysis to evaluate total willingness to pay for the bridge

Diff: 3    Type: SA     Page Ref: 6-7

Topic:  1.4. Dealing with abstractions

Skill:  Applied

User1:  Qualitative

 

13) You were notified by an economics expert that the total costs of a project you are about to start are approximately $50 000. In order to justify this project, what additional economic information do you need?

Answer:  First of all, it is necessary to understand what this value includes. Usually costs are divided into capital costs and operating costs and those are two different types of costs. Second, it is necessary to understand whether or not the value of total costs is given as of today or at some other time. Finally, the benefits of the project should be evaluated to compare them with total costs.

Diff: 1    Type: SA     Page Ref: 3-4

Topic:  1.3. Making decisions

Skill:  Recall

User1:  Qualitative

 

14) Maintenance costs are an important component of the total costs of many engineering projects. Normally in engineering projects these costs are added to the purchase price of a piece of engineering equipment. For the following items, describe how important the maintenance costs are compared to the item’s price:

(i)    A tractor

(ii)  A desk

(iii) A computer

(iv)  An oil pump

Answer:  The maintenance costs of a tractor, computer and oil pump are important. Particularly maintenance costs of a tractor are very important since the quantity and quality of the services, produced by the tractor, depend on these costs. To lesser extent maintenance costs are important in case of oil pump and computer. Maintenance costs of a desk are not important because they are very low, and have little effect on the services provided by the desk.

Diff: 1    Type: SA     Page Ref: 3-6

Topic:  1.3. Making decisions

Skill:  Applied

User1:  Qualitative

 

 

15) Suppose that you want to buy a used car for $3 000, but you don’t have enough cash. List some of the (legal) strategies that you might consider.

Answer:  Possible alternatives for financing the purchase of a used car are:

–  Not to buy (a “do nothing” alternative);

–  To borrow money from your parents;

–  To take a loan from a commercial bank;

–  To finance through a car dealer;

–  To postpone the purchase and earn money working extra hours.

Diff: 2    Type: SA     Page Ref: 3-6

Topic:  1.3. Making decisions

Skill:  Applied

User1:  Qualitative

 

Engineering Economics, 5e (Fraser)

Chapter 5   Comparison Methods: Part II

 

5.1   Multiple Choice Questions

 

1) The internal rate of return (IRR) is

1. A) the interest rate that allows an investor to recoup the initial investment.
2. B) the interest rate that ensures the positive cash flow of a project.
3. C) the interest rate that breaks even a project’s costs and benefits.
4. D) the interest rate that measures the return from operating costs
5. E) the interest rate that is set up by an investor to guarantee that the return on investment will be higher than from a bank interest rate.

Answer:  C

Diff: 1    Type: MC     Page Ref: 127

Topic:  5.2. Internal rate of return (IRR)

Skill:  Recall

User1:  Qualitative

 

2) A project pays $20 million right away, requires $10 million in investment in year 1, and pays $3 million in year 2. What is the approximate ERR of this project if the MARR is 10%??

1. A) 1.72%
2. B) 172%
3. C) 1.50%
4. D) 150%
5. E) 50%

Answer:  B

Diff: 1    Type: MC     Page Ref: 141

Topic:  5.3. Internal rate of return comparisons

Skill:  Applied

User1:  Quantitative

 

3) The fundamental idea behind comparison of mutually exclusive projects on the basis of incremental IRR is

1. A) different fractions of investments are associated with different levels of productivity.
2. B) all investments are non-simple.
3. C) some investments are not productive.
4. D) multiple IRRs.
5. E) high uncertainty.

Answer:  A

Diff: 2    Type: MC     Page Ref: 134-135

Topic:  5.3. Internal rate of return comparisons

Skill:  Recall

User1:  Qualitative

 

 

4) The internal rate of return (IRR) is negative if

1. A) a project is losing money.
2. B) a cash inflow exceeds a cash outflow.
3. C) a project just breaks even.
4. D) a project is a simple investment.
5. E) IRR cannot be negative.

Answer:  A

Diff: 1    Type: MC     Page Ref: 128

Topic:  5.2. Internal rate of return (IRR)

Skill:  Recall

User1:  Qualitative

 

5) A project is represented by the following graphs:

 

 

What is the internal rate of return for this project?

1. A) 0%
2. B) 4%
3. C) 10%
4. D) 14%
5. E) 15%

Answer:  D

Diff: 1    Type: MC     Page Ref: 130-131

Topic:  5.2. Internal rate of return (IRR)

Skill:  Recall

User1:  Quantitative

 

6) Two mutually exclusive alternatives are being compared. We should choose the alternative that:

1. A) has a higher minimum acceptable rate of return assuming the lives of the alternatives are equal.
2. B) has a higher internal rate of return assuming the lives of the alternatives are equal.
3. C) has a higher internal rate of return regardless of the lives of the alternatives.
4. D) has an incremental investment with a rate of return equal to the minimum acceptable rate of return.
5. E) has an incremental investment with the rate of return exceeding minimum acceptable rate of return.

Answer:  E

Diff: 2    Type: MC     Page Ref: 132-136

Topic:  5.3. Internal rate of return comparisons

Skill:  Recall

User1:  Qualitative

 

7) A project requires an initial investment of $100 000 and immediately pays $25 000. The next year this project requires an additional investment of $50 000 and does not pay anything. In the following year the project pays $150 000. The internal rate of return (i) for this project can be obtained by

1. A) using a present worth factor.
2. B) solving a quadratic equation.
3. C) calculating an external rate of return.
4. D) solving a system of two equations.
5. E) solving an ith degree polynomial equation.

Answer:  B

Diff: 3    Type: MC     Page Ref: 127

Topic:  5.3. Internal rate of return comparisons

Skill:  Recall

User1:  Quantitative

 

8) What is the difference between the internal rate of return (IRR) and the external rate of return (ERR)?

1. A) The IRR is earned by a project whereas the ERR is earned outside of it
2. B) The ERR equals the difference between the IRR and the MARR
3. C) The IRR usually equals the MARR whereas the ERR is always higher than the MARR
4. D) The ERR is earned when a project’s return is used for the purpose of further reinvestment while the IRR is typically used for calculating the net return of a project
5. E) For a given explicit rate of return, a project can have more than one value for its ERR but can have only one value for its IRR

Answer:  A

Diff: 2    Type: MC     Page Ref: 140-142

Topic:  5.3. Internal rate of return comparisons

Skill:  Recall

User1:  Qualitative

 

9) What economic concept is used as background for the external rate of return?

1. A) a present worth
2. B) a net cash flow
3. C) an internal rate of return
4. D) a payback period
5. E) an opportunity cost

Answer:  E

Diff: 3    Type: MC     Page Ref: 140

Topic:  5.1. Introduction

Skill:  Applied

User1:  Qualitative

 

 

10) A project requires no initial investment. It costs $4 000 a year from now and earns $8 000 two years from now. What is its internal rate of return?

1. A) 24%
2. B) 50%
3. C) 75%
4. D) 100%
5. E) 141%

Answer:  D

Diff: 1    Type: MC     Page Ref: 127

Topic:  5.3. Internal rate of return comparisons

Skill:  Applied

User1:  Quantitative

 

11) What assumption makes the external rate of return a proxy?

1. A) All receipts of a project are assumed to be invested at the minimum acceptable rate of return
2. B) Receipts that occur when a project balance is positive are assumed to be invested at the minimum acceptable rate of return
3. C) All receipts and disbursements of a project are assumed to be invested at the minimum acceptable rate of return
4. D) Receipts and disbursements that occur when a project balance is positive are assumed to be invested at the minimum acceptable rate of return
5. E) A project’s balance should be positive all the time

Answer:  A

Diff: 2    Type: MC     Page Ref: 141-142

Topic:  5.3. Internal rate of return comparisons

Skill:  Recall

User1:  Qualitative

 

12) The external rate of return must be used if

1. A) there are multiple internal rates of return
2. B) a project involves only simple investments.
3. C) a project starts with cash outflow
4. D) a project requires multiple investments and generates multiple benefits
5. E) it is impossible to calculate the minimum acceptable rate of return.

Answer:  A

Diff: 2    Type: MC     Page Ref: 141-142

Topic:  5.3. Internal rate of return comparisons

Skill:  Recall

User1:  Quantitative

 

 

13) A project is subject to the following cash flow diagram:

What rate of return would it be appropriate to use in this case?

1. A) ERR
2. B) IRR
3. C) MARR
4. D) Market rate of return
5. E) Explicit rate of return

Answer:  B

Diff: 2    Type: MC     Page Ref: 140-142

Topic:  5.3. Internal rate of return comparisons

Skill:  Recall

User1:  Qualitative

 

14) What is the major advantage of the internal rate of return comparison method?

1. A) It gives an explicit measure of profit.
2. B) It has familiar meanings to decision makers.
3. C) It is very easy to calculate and therefore it is commonly used.
4. D) It takes into account the need to have capital recovered quickly.
5. E) It facilitates the comparison of projects of different size.

Answer:  E

Diff: 3    Type: MC     Page Ref: 147

Topic:  5.4. Rate of return and present/annual worth methods compared

Skill:  Recall

User1:  Qualitative

 

15) Which of the following statements is true with regard to the ERR?

1. A) The approximate ERR is just a proxy for the IRR.
2. B) The precise ERR is a proxy for the IRR.
3. C) For a simple investment, the precise ERR is greater than the IRR.
4. D) For a simple investment, the approximate ERR is greater than the IRR.
5. E) An acceptable project will earn at least the approximate ERR.

Answer:  E

Diff: 2    Type: MC     Page Ref: 141

Topic:  5.3. Internal rate of return comparisons

Skill:  Recall

User1:  Qualitative

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