Question

Answer the following questions:

1. Which of the following choices conveys this definition: “Past costs that have no bearing on current decisions.”
a. Fixed Costs
b. Variable Costs
c. Sunk Costs
d. Costs adjusted for inflation

2. Which of the following terms conveys this definition: “…referred to as the unrecovered investment, the adjusted cost basis, and the adjusted basis” portion of an asset.
a. Book Value
b. Opportunity Cost
c. Future Worth
d. Equivalence

3. A company is considering three options regarding the replacement of a machine it purchased 4 years ago for $229,000. The company’s MARR is 12%.

Option 1: Keep the existing machine but it requires an expenditure of $107,250 to upgrade and will cost an additional $41,325 per year to operate and maintain. At the end of its asset life (5 years from now) the salvage value will be negligible.

Option 2: Purchase a new machine for $212,755 that will have an annual operating and maintenance cost of $43,650 and a salvage value of $56,500 at the end of its asset life (5 years from now). If the new machine is purchased the old machine can be sold for an estimated $45,950.

Option 3: Lease a machine with 5 beginning-of-year lease payments of $30,850 with an annual operating and maintenance cost of $44,785.

Question: Using the “insider’s approach, calculate the EUAC values for all three options and recommend the best. Please select the closest answer and if needed place your work in the text space below.
a. Select Option 1 because its EUAC = -$70,771
b. Select Option 2 because its EUAC = -$81,030
c. Select Option 3 because its EUAC = -$66,590
d. Value not shown, place answer and show work in space provided below.

4. Reference the data from Question 3 and using the “outsider’s” viewpoint approach, calculate the EUAC values for all three options and recommend the best. Please select the closest answer and if needed place your work in the text space below.
a. Select Option 1 because its EUAC = -$83,824
b. Select Option 2 because its EUAC = -$93,777
c. Select Option 3 because its EUAC = -$79,337
d. Value not shown, place answer and show work in space provided below

5. Which of the following statements reflect the difference between the Consumer Price Index and the Producer Price Index?
a. One uses data from a family of over 1000 indexes that adjusted for inflation; the other is presented in “real” dollars for the same 1000 items.
b. One presents the data from a year-to-year analysis while the other presents it monthly.
c. One provides a better measurement of the inflation effects for a particular business, while the other measures the price changes that occur from one month to the next for a specified set of products.
d. Actually there is no difference between the two indexes, they both measure the same thing.

6. Your company has just purchased a piece of equipment for $97,850. The tax recovery period is 8 years with an expected $12,350 salvage value. What is the year 4 depreciation value using the straight line method? Select the closest value.
a. $10,056
b. $10,151
c. $10,688
d. Value not shown, place answer and show work in space provided below.

7. Your company has just purchased a piece of equipment for $76,260. The tax recovery period is 7 years with an expected $13,455 salvage value. What is the year 5 depreciation value using the MACRS method? Select the closest value.
a. $6,810
b. $7,965
c. $8,972
d. Value not shown, place answer and show work in space provided below.

8. Which of the following statements are true regarding depreciation.
a. MACRS-GDS classifies land as a 27.5-year depreciable property.
b. MACRS is the only depreciation method approved by the IRS for computing income tax liability.
c. Intangible property cannot be depreciated even within the MACRS classifications.
d. MACRS is not classified as an “accelerated” depreciation method because it uses the half-year convention.

9. Calculate: The real return on investment (ir) if the inflation rate (f) is 2.56%, and the combined rate (ic) is 6.25%. Select the closest value.
a. 3.22%
b. 3.49%
c. 3.60%
d. Value not shown, place answer and show work in space provided below.


10. Calculate: The MARRr if the inflation rate (f) is 3.18%, and the MARRc is 6.33%. Select the closest value.
a. 3.05%
b. 3.85%
c. 4.12%
d. Value not shown, place answer and show work in space provided below.

11. Calculate: The MARRc if the MARRr is 8.65% and the inflation rate (f) is 2.01%. Select the closest value.
a. 6.02%
b. 7.55%
c. 10.83%
d. Value not shown, place answer and show work in space provided below.

12. Your company is in the process of purchasing a piece of equipment to manufacture a new product. Listed below are the estimated costs to produce the product over the planning horizon. Based on these data, calculate the break-even value for the number of units needed to be produced each year.

Selling price/unit = $9.50
Equipment Cost = $59,855
Packaging and shipping cost/unit = $0.75
Operating and maintenance cost /hour = $64.50
Production time hours/750 units = 10
Sales and marketing cost/year = $26,950
Incremental equipment overhead cost/year = $17,750
MARR = 11%
Planning horizon years = 5
Salvage Value = $15,000
Assume the machine’s annual savings = $14,750
Value of the machine decreases at the yearly rate of = $8,971

a. 7603 units
b. 7695 units
c. 7718 units
d. Value not shown, place answer and show work in space provided below.

13. Using the data from the question above (Question 12), suppose the salvage value decreases linearly over the five years what is the break-even value of “n”?
a. 2.50 years
b. 2.75 years
c. 2.95 years
d. Value not shown, place answer and show work in space provided below.

14. Using the data from the question above (Question 12), suppose the salvage value decreases “geometrically” over the eight-year period calculate the geometric rate.
a. -0.2418
b. -2.418%
c. -26.38%
d. Value not shown, place answer and show work in space provided below.

15. Using the data from the question above (Question 12), suppose the salvage value decreases “geometrically” over the eight year period calculate the break-even value of “n”?
a. 4.00 years
b. 4.24 years
c. 4.48 years
d. Value not shown, place answer and show work in space provided below.

16. Which of the following choices might be defined as “An interest rate that does not include inflation.”
a. Then-Current Dollars
b. Real Interest Rate
c. Base Cost Deflation Rate
d. MARR

17. Which of the following choices might be defined as “Determining the indifference value of a particular parameter.”
a. Rate of Return
b. Sensitivity analysis
c. Risk analysis
d. Break-even analysis

18. Which of the following choices might be defined as “…used to determine the impact on the measure of economic worth when values of one or more parameters vary over specified ranges.”
a. Rate of Return
b. Sensitivity analysis
c. Risk analysis
d. Break-even analysis

19. Which of the following might you be performing if “… probabilities are assigned to various values of one or more parameters, and a probabilistic statement is made regarding the economic worth for one or more investments.” Which of the following choices might be defined as “Determining the indifference value of a particular parameter.”
a. Rate of Return
b. Sensitivity analysis
c. Risk analysis
d. Break-even analysis

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