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Exam1_2006Solution - Exam 1 IE 226 J Hartman Spring 2006...

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Exam 1 Name___________________ IE 226 J. Hartman February 23, 2006 Spring 2006 INSTRUCTIONS: Answer all of the following questions on the following eight pages. If you need additional paper to work on, come to me and I will provide you with blank paper. Show all of your work (unless you do not want credit). Point values are adjacent to the problem number. [2] 1. Is depreciation a cash flow? Explain. No. It is an expense that reduces taxes. [2] 2. What is depletion? Depreciation method generally used for natural resources (such as mines). [2] 3. What is the most difficult step in the decision-making process? Defend your answer. Defend your answer. [2] 4. Give two advantages to using the Delphi method as opposed to brainstorming as a group. Overcome many problems…. Defend your answer. [2] 5. Describe a situation (set of cash flows) which may result in multiple internal rates of return. Defend your answer. Cash flow diagrams with multiple sign changes.
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[5] Bell Canada announced a four-year agreement worth about C$84 million to implement an integrated network based on Internet Protocol Communications and convert about 1,100 bank branches to an IP Virtual Private Network across Canada for the Bank of Montreal. Assume that 65 branches are to be converted each quarter of the four-year contract and each conversion is worth C$76,000 in revenue. If Bell Canada is paid at the end of the each quarter according to the number of branches converted, what is the present value (end of 2005) of the contract? Assume the contract begins in the first quarter of 2006 and runs through 2009 and the interest rate is 12% compounded quarterly. 12% compounded quarterly translates to 12%/4 = 3% per quarter Sales are (65)(C$76,000) = C$4.94 million per quarter Sales run from Quarter 1 of 2006 through Quarter 4 of 2009: 16 periods Time zero is beginning of Quarter 1, 2006 (end of 2005) P = 4.94M(P/A,3%,16) = 4.94M(12.5611) = C$62.05M Marine Engineering Co, each with a capacity of 318,000 tons of crude oil. Assume each tanker costs $110 million. If one tanker is to be delivered in 2007, two in 2008, and three in 2009, what is the present value of the order (payments made upon delivery) at the time it was placed (end of 2005)? Assume that interest is 11.333% compounded continuously? r=11.333% compounded continuously translates to e
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Exam1_2006Solution - Exam 1 IE 226 J Hartman Spring 2006...

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