This preview shows pages 1–3. Sign up to view the full content.
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
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document1
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.
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
This is the end of the preview. Sign up
to
access the rest of the document.
 Winter '09
 Jassim

Click to edit the document details