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M I M E
3 1 0
E N G I N E E R I N G
E C O N O M Y
SAMPLE CLASS TESTS
Department of Mining and Materials Engineering
McGill University
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F O R E W O R D
The following are recent Engineering Economy class tests.
Their purpose is to give you exam
ples of typical problems that you should be able to solve in the course of such tests.
These are
supplied without solutions (answers are given for numerical problems), to maximize the benefits
that you will derive from solving them on your own.
If you have questions concerning any par
ticular problem, please consult the TAs or course instructor(s) during the appropriate hours.
Prof. Bilodeau
Note
:
Prior to the Fall 2003 term, the second class test covered material from chapters 1 to 6.
1
TEST # 2 – FALL '04
———————————————————————————————————————
PART 1.
Multiplechoice Problems and Statements
Use the following information to answer questions 1 to 3.
A fiberglass boat producer has the following production variables:
Fixed cost (FC),
$15 000 per
month; constant average variable cost (vc),
$320; selling price (p),
$500.
1.
Determine the contribution margin if the fixed cost is reduced to $5000, the average variable cost is
increased to $520, and the selling price is increased to $720.
[$200]
2.
By how much must the fixed cost be reduced
if the breakeven rate is to be 40 units per month?
[ $7800]
3.
Which statement(s) is/are correct when the situation in question 1 above is compared to the original
situation described in the problem statement?
[I, II & III]
I)
More flexible operation
II)
Less risk
III)
Higher profit growth
4.
RJ purchased at par a bond with a 10% annual coupon, 5 years to maturity and a face value of $1000.
On the day he received the second coupon payment, RJ sold the bond for $1200 and immediately rein
vested this amount in other bonds with a 7% annual coupon, 3 years to maturity and selling at their par
value of $1000 (assume that RJ can purchase a fraction of a bond, so that the full $1200 can be rein
vested).
If RJ kept these second bonds to maturity, what was his yieldtomaturity over the fiveyear pe
riod?
[12.28 %]
5.
A project with an initial investment of $10 000 will generate cash flows of $3000 per year over a 5year
period.
The discount rate is 15.235%.
The project’s net present value (NPV) and internal rate of return
(IRR) are, respectively:
[$0.764 and 15.2 %]
6.
A project that costs $1.5 million today will generate annual cash flows of $1 million for the next 3 years.
At the end of 3 years, the project’s salvage value will be zero, but there will be a disposal expenditure of
$500 000.
The internal rate of return (IRR) of this project is:
[34.6 %]
7.
Consider a 10year period characterised by payments of $20 000 at the beginning
of years 8, 9 and 10.
Determine the equivalent ordinary annuity
over the first sevenyear period using an interest rate of 12%
compounded annually over the first seven years, and 10% compounded annually over the final three
years.
(Round to the nearest hundred dollars)
[$5400]
8.
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This note was uploaded on 10/06/2009 for the course MIME 310 taught by Professor Bilido during the Summer '08 term at McGill.
 Summer '08
 Bilido

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