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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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1 TEST # 2 – FALL '04 ——————————————————————————————————————— PART 1. Multiple-choice 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 break-even 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 yield-to-maturity over the five-year pe- riod? [12.28 %] 5. A project with an initial investment of $10 000 will generate cash flows of $3000 per year over a 5-year 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 10-year period characterised by payments of $20 000 at the beginning of years 8, 9 and 10. Determine the equivalent ordinary annuity over the first seven-year 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. Order the investment criteria of accounting rate of return (ARR), discounted payback period (DPP) and net present value (NPV) from the most desirable to the least desirable? [NPV, DPP, ARR] 9. GJ Inc. is considering an investment proposal that will yield cash flows of $30 000 per year in years 1 through 4, $35 000 per year in years 5 through 9, and $40 000 in year 10. This project will cost the firm $150 000 today. Assuming that money flows uniformly during the year and the firm's cost of capital is 10 percent, the payback period (PP) for this proposal is: [4.9 years] 10. What is the discounted payback period (DPP) of the following project if the cost of capital is 14%? [4.6 years] Year Time 0 1 2 3 4 5 ––––––––––––––––––––––––––––––––––––––––––––––––––– Cash Flow -$60 22 22 22 10 10
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