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EIN4354 Module 1

Answer Key: D

Part 2 of 8 - Question 2 2.0 Points

Answer Key: C

Part 3 of 8 - Question 3 2.0 Points

D. Investments cost money.

Answer Key: D

Part 4 of 8 - Questions 4-6 6.0 Points

A firm reduces its support staff and signs a contract outsourcing its accounting needs to another company. This

would be considered a(n):

A. Cost-cutting program.

B. Expansion investment.

C. Profit-enhancing program.

Answer Key: A

Question 5 of 10 2.0 Points

B. Replacement investment.

C. Profit-enhancing program.

D. Cost-cutting program.

Answer Key: A

Question 6 of 10 2.0 Points

A. Cost-cutting program.

C. Expansion investment.

D. Profit-enhancing program.

Answer Key: B

Part 5 of 8 - Question 7 2.0 Points

A firm reduces its support staff and signs a contract outsourcing its accounting needs to another company. This

would be considered a(n):

A. Replacement program.

Feedback: The support group is being replaced.

B. Expansion program.

D. Abandonment program.

Answer Key: A

Part 6 of 8 - Question 8 2.0 Points

Feedback: Requires technical and economic analysis.

Answer Key: A

Part 7 of 8 - Question 9 2.0 Points

D. Select the best opportunity available.

Answer Key: A

Part 8 of 8 - Question 10 2.0 Points

Traditional engineering economy tools are most closely associated with which step in the decision-making process:

D. Defining an opportunity.

Answer Key: C

EIN4354 Module 2

Sales of a product total $2.7 million in a given period with costs of those sales totaling $3.2 million in the same period.

The net cash flow for the period is:

Feedback: $2.7M - $3.2M = -$0.5M

C. An outflow of $500,000.

Answer Key: C

Part 2 of 10 - Question 2 2.0 Points

Question 2 of 10 2.0 Points

A company sells 500,000 units for $10.50 each in a given period. The per unit cost of production is $3.48 while the

fixed costs are $2.31 million. The net cash flow for the period is:

Feedback: 500,000($10.50-$3.48) - $2.31M = $1.2M

D. An outflow of $4.04 million.

Answer Key: C

Part 3 of 10 - Question 3 2.0 Points

A manufacturer adds a production line to its facility at the cost of $13.4 million (at time zero). The line generates $8.8

million in revenue in year one against costs of $5.3 million. Revenues are expected to grow by $750,000 each year

thereafter while costs are to remain steady. After seven years of production, the line is to be scrapped for a salvage

value (revenue) of $1.4 million. Assuming end of year cash flows, the net cash flow in period 2 is:

Feedback: $8.8M + $0.75M - $5.3M = $4.25M

D. Inflow of $8.8 million.

Answer Key: C

Part 4 of 10 - Question 4 2.0 Points

A manufacturer adds a production line to its facility at the cost of $13.2 million (at time zero). The line generates $5.8

million in revenue in year one against costs of $3.3 million. Revenues are expected to grow by $350,000 each year

thereafter while costs are to remain steady. After seven years of production, the line is to be scrapped for a salvage

value (revenue) of $1.3 million. Assuming end of year cash flows, the net cash flow in period 7 is:

Feedback: Don't forget costs and salvage value.

D. Inflow of $5.9 million.

Answer Key: D

Part 5 of 10 - Question 5 2.0 Points

A manufacturer adds a production line to its facility at the cost of $13.4 million (at time zero). The line generates $8.8

million in revenue in year one against costs of $5.3 million. Revenues are expected to grow by 3% each year thereafter

while costs are to remain steady. After seven years of production, the line is to be scrapped for a salvage value

(revenue) of $1.4 million. Assuming end of year cash flows, the net cash flow in period 4 is:

Feedback: Don't overstate the revenue.

D. Inflow of $4.32 million.

Answer Key: D

Part 6 of 10 - Question 6 2.0 Points

A manufacturer adds a production line to its facility at the cost of $13.2 million (at time zero). The line generates $6.8

million in revenue in year one against costs of $2.3 million. Revenues are expected to grow by 2.5% each year

thereafter while costs are to remain steady. After seven years of production, the line is to be scrapped for a salvage

value (revenue) of $1.3 million. Assuming end of year cash flows, the net cash flow in period 7 is:

Feedback: $6.8M(1.025)^6 - $2.3M + $1.3M =

C. Inflow of $9.19 million.

Answer Key: B

Part 7 of 10 - Question 7 2.0 Points

A manufacturer adds a production line to its facility at the cost of $13.4 million (at time zero). The line generates $8.8

million in revenue in year one against costs of $5.3 million. Revenues are expected to grow by 3% each year thereafter

while costs are to remain steady. After seven years of production, the line is to be scrapped for a salvage value

(revenue) of $1.4 million. Assuming end of year cash flows, the net cash flow at time 0 is:

Feedback: Only an investment cost at time zero (production starts in period 1).

D. Inflow of $13.4 million.

Answer Key: C

Part 8 of 10 - Question 8 2.0 Points

Costs to provide a call center for customer service include labor (estimated at $65,000 in month one), space (lease

cost of $32,000 per month) and technology licensing ($3,200 per month). If labor costs are expected to increase 1.2%

per month (after month 1), what is the best cost estimate for operating in month ten:

A. $112,634.

B. $107,567.

C. $100,200.

Feedback: Inflate the labor costs.

D. $108,435.

Answer Key: B

Part 9 of 10 - Question 9 2.0 Points

Space and equipment for a call center to provide customer service are purchased for $875,000. Monthly expenses

include labor (estimated at $75,000 in month one), and technology licensing ($32,000 in month one). Assuming end of

month cash flows and no expected increase in costs over time, the cash flow at time zero is:

A. Outflow of $875,000.

Feedback: Only the investment cost occurs at time zero.

B. Outflow of $982,000.

C. Outflow of $800,000.

D. Outflow of $107,000.

Answer Key: A

Part 10 of 10 - Question 10 2.0 Points

one location to another.

Feedback: Absolute references are absolute! They do

from one location to another.

not change when copied.

C. There is no difference.

D. An absolute reference changes when copied from one

location to another.

Answer Key: B

EIN4354 Module 3

$10,000 is borrowed and the loan is repaid (in one payment) at the end of four years. How much is paid, assuming

simple interest with a rate of 4% per year?

A. $11,600.

Feedback: .04(4)($10,000) + $10,000

B. $11,698.

C. $11,400.

D. $13,698.

Answer Key: A

Part 2 of 5 - Question 2 4.0 Points

$100,000 is borrowed and the loan is repaid (in one payment) at the end of four years. How much is paid, assuming an

interest rate of 3% per year?

A. $108,240.

B. $112,000.

Feedback: Not simple interest! $100,000(1.03)^4

C. $112,551.

D. $108,000.

Answer Key: C

Part 3 of 5 - Question 3 4.0 Points

$10,000 is placed into an account which pays 10% per year, compounded monthly. How much will be in the account at

the end of the 4th year?

A. $14,894.

Feedback: $10,000(1 + .10/12)^48

B. $14,641.

C. $14,386.

D. $14,289.

Answer Key: A

Part 4 of 5 - Question 4 4.0 Points

The interest rate is 15% per year compounded quarterly. The semi-annual rate (per six months) is most closely:

A. 7.64%.

B. 7.50%.

C. 7.74%.

Feedback: (1 + .15/4)^2

D. 7.93%.

Answer Key: A

Part 5 of 5 - Question 5 4.0 Points

Two loan options are made available: 5.2% compounded continuously or 1.3% per quarter. Which should you take?

A. The first rate, with an effective annual interest rate of 5.30%.

Feedback: (1 + .013)^4 - 1

Answer Key: D

EIN4354 Module 5

A contract is signed to deliver 3 million cubic feet of natural gas each year over the next 10 years. The time zero price

is $6 per cubic foot and the inflation rate for natural gas is 4% per year. Which of the following statements is correct

with regards to the revenue generated in year six (deliveries start in year 1)?

A. The real dollar cash flow is $18 million and the current dollar cash flow

is $20.25 million.

B. The current dollar cash flow is $18 million and the real dollar cash flow

is $22.8 million.

C. The current dollar cash flow is $18 million and the real dollar cash flow Feedback: Current: (3M)$6(1.04)^6 =

is $14.2 million. $22.8M

Real: (3M)$6 = $18M

D. The real dollar cash flow is $18 million and the current dollar cash flow

is $22.8 million.

Answer Key: D

Part 2 of 5 - Question 2 4.0 Points

A mining company removes 100,000 ounces of gold, priced at $500 per ounce, and holds it for 4 years. If inflation (for

gold) is 4.9% per year over that time, how much money will they receive for selling all 100,000 ounces at the end of the

four years?

A. $60.5 million.

Feedback: 100,000($500)(1.049)^4

B. $50.0 million.

C. $57.4 million.

D. $52.4 million.

Answer Key: A

Part 3 of 5 - Question 3 4.0 Points

A loan of $100,000 is taken out which requires an annual interest payment of 6% of the outstanding principal. If no

principal payments are made over time and inflation is 3.1% per year, the payment at the end of year five is:

A. A real dollar cash flow of $5,150 and a current dollar cash flow of

$6,989.

B. A current dollar cash flow of $6,989 and a real dollar cash flow of

$6,000.

C. A real dollar cash flow of $6,000 and a current dollar cash flow of

$5,150.

D. A current dollar cash flow of $6,000 and a real dollar cash flow of

Feedback: Loan is a contract. Current is

$5,150.

paid.

Answer Key: D

Part 4 of 5 - Question 4 4.0 Points

You expect to need 10 million tons of coal in three years for a new power plant. The current price is $75 a ton. If

inflation (for coal) is 2.8% per year, what price will you pay for the coal?

A. $871 million.

B. $815 million.

Feedback: 10M($75)(1.028)^3

C. $712 million.

D. $750 million.

Answer Key: B

Part 5 of 5 - Question 5 4.0 Points

A. Exchange rates are used to convert one currency to another currency at different points in time.

B. Exchange rates are used to convert one currency to another currency at the same point in time.

Answer Key: B

EIN4354 Module 6

$117,000 is placed into an account that earns 3.7% per period. What is the maximum amount that can be pulled out of

the account after nine periods? (Note that answers are rounded to the nearest ten dollars.)

A. $168,260.

B. $162,330.

C. $156,460.

D. $162,250.

Feedback: $117,000(F/P,3.7%,9) = $162,250

Answer Key: D

Part 2 of 8 - Question 2 2.0 Points

You empty an account, pulling $23,450 out after four periods and the account earned 3% per period. How much was

placed in the account at time zero?

A. $20,300

B. $21,460

C. $20,228

D. $20,835

Feedback: $23,450(P/F,3%,4) = $20,835

Answer Key: D

Part 3 of 8 - Question 3 2.0 Points

Payments of $3,424 are made into an account (at the end of each period) for 10 periods. If the account earns 2% per

period, how much is in the account after the final payment?

A. $33,400

B. $37,492

Feedback: $3,424(F/A,2%,10) = $37,492

C. $41,666

D. $37,519

Answer Key: B

Part 4 of 8 - Question 4 2.0 Points

$25,250 is taken from an account, earning 2% per period, at the end of each period for six consecutive periods, leaving

the account empty. How much was placed in the account at time zero?

A. $119,016

B. $141,435

C. $148,894

Feedback: $25,250(P/A,2%,6) = $141,435

D. $163,418

Answer Key: B

Part 5 of 8 - Question 5 3.0 Points

Periodic withdrawals, starting at $3,546 and increasing $2,610 each period thereafter, are made from an account

earning 4% per period. What is the minimum amount that must be in the account at time zero if the final withdrawal

occurs at the end of period seven?

A. $65,825

Feedback: $3,546(P/A,4%,7) + $2,610(P/G,4%,7)

B. $63,130

C. $65,790

D. $68,416

Answer Key: A

Part 6 of 8 - Question 6 3.0 Points

Periodic payments, starting at $4,240 and increasing $3,006 each period thereafter, are made into an account earning

13% per period. What is the maximum amount that can be pulled out of the account after nine periods (immediately

after the final payment)?

A. $213,713

B. $202,442

C. $226,451

D. $214,202

Feedback: $4,240(F/A,13%,9) + $3,006(F/G,13%,9)

Answer Key: A

Part 7 of 8 - Question 7 3.0 Points

Periodic withdrawals, starting at $2,619 and increasing 3.2% each period thereafter, are made from an account earning

4.4% per period. What is the minimum amount that must be in the account at time zero if the final withdrawal occurs at

the end of period nine?

A. $22,840

B. $26,825

C. $21,567

D. $23,744

Feedback: $2,619(P/A1,3.2%,4.4%,9)

Answer Key: C

Part 8 of 8 - Question 8 3.0 Points

Question 8 of 8 3.0 Points

Periodic payments, starting at $753 and increasing 1.1% each period thereafter, are made into an account earning

11.8% per period. What is the maximum amount that can be pulled out of the account after four periods (immediately

after the final payment)?

A. $3,062

B. $2,979

C. $3,642

Feedback: $753(P/A1,1.1%,11.8%,4)

D. $3,228

Answer Key: C

EIN4354 Module 7

$17,493 is placed into an account that earns 10% per period. What is the maximum (equal) amount that can be pulled

out of the account at the end of each period for four consecutive periods?

A. $5,519

B. $5,722

Feedback: $17,493(A/P,10%,4)

C. $7,034

D. $4,615

Answer Key: A

Part 2 of 6 - Question 2 2.0 Points

$77,724 is required at the end of four periods. What is the minimum amount that can be placed into an account,

earning 12% per period, at the end of each period to have the funds?

A. $17,177

B. $23,033

C. $12,235

D. $16,263

Feedback: $77,724(A/F,12%,4)

Answer Key: D

Part 3 of 6 - Question 3 3.0 Points

Periodic payments, starting at $1,263 and increasing $318 each period thereafter are made into an account earning

20% per period. What are the equivalent equal periodic payments over the first six periods?

A. $1,785

B. $1,892

Feedback: $1,263 + $318(A/G,20%,6)

C. $1,612

D. $2,011

Answer Key: B

Part 4 of 6 - Question 4 3.0 Points

Periodic payments, starting at $2,113 and increasing 9.9% each period thereafter, are made into an account earning

21.9% per period. What are the equivalent equal periodic payments over the first four periods?

A. $2,629

Feedback: $2,113(A/A1,9.9%,21.9%,4)

B. $2,924

C. $2,392

D. $2,176

Answer Key: C

Part 5 of 6 - Question 5 5.0 Points

Assuming a periodic interest rate of 5%, what is the present value (at time zero) of the following cash flow diagram: A1

= $100, A2 = $200, A3 = $300, A4 = $400, A5 = $400, A6 = $400 and A7 = $400.

A. $100(P/G,5%,4) + $400(F/A,5%,3)(P/F,5%,7)

B. $100(P/G,5%,4)(F/P,5%,1) +

$400(F/A,5%,4)(P/F,5%,7)

C. $100(P/G,5%,4)(F/P,5%,1) +

$400(F/A,5%,3)(P/F,5%,7)

$400(F/A,5%,4)(P/F,5%,7)

Answer Key: B

Part 6 of 6 - Question 6 5.0 Points

Deutsche Post signed a contract at the end of January, 2010 for the delivery of 1800 trucks from Volvo for its DHL-

Express freight fleet over a two year period. Assume that trucks are delivered at the end of the month, with 20 trucks

delivered in March, 40 in April, 60 in May, 80 in June, 100 in July and 100 in each month thereafter until the order is

complete. If interest is 12% per year compounded monthly, what is the present worth (end of January, 2010) of the

order? The cost is $55,000 per truck, payable upon delivery.

A. $93.1 million.

B. $79.6 million.

C. $87.6 million.

Feedback: $55,000[20(P/G,1%,5) + 100(P/A,1%,16)(P/F,1%,5)]

D. $84.6 million.

Answer Key: C

EIN4354 Module 8

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 3% per quarter.

A. C$74.0M

B. C$57.6M

C. C$34.5M

D. C$62.1M

Feedback: C$76,000(65)(P/A,3%,16)

Answer Key: D

Part 2 of 4 - Question 2 5.0 Points

The United Arab Emirates agreed to purchase six C-17 airlifter planes from Boeing for humanitarian operations. Three

are to be delivered in 2011, two in 2012 and one in 2013. If the cost per plane is $210 million, paid upon delivery, and

interest is 12% per year, what is the present value of the contract (beginning of 2010) assuming end of year deliveries?

A. $935M

Feedback: $210M[(3)(P/A,12%,3) - (1)(P/G,12%,3)](P/F,12%,1)

B. $969M

C. $1.05B

D. $1.26B

Answer Key: A

Part 3 of 4 - Question 3 5.0 Points

Chicago Bridge and Iron Co. received a contract to build a cryogenic gas-processing plant with capacity of 650 million

cubic feet per day. Assume the facility operates at capacity for 250 days per year, generating revenues of $0.75 per

1000 cubic feet. If the revenue (price) is a time zero estimate and prices are expected to grow at 3.5% per year, what is

the present value of 10 years of production and sales assuming a market interest rate of 12% per year. (Assume

production begins at time one and end of year cash flows.)

A. $1,330M

B. $810M

Feedback: 650M(250)($0.75)(1.035)/1000(P/A1,3.5%,12%,10)

C. $1,042M

D. $783M

Answer Key: B

Part 4 of 4 - Question 4 5.0 Points

You take your first job out of college as an engineer with a salary of $58,000 per year. You decide to contribute $2,000

into your 401K retirement plan at the end of your first year (when you are 22 years old). If you continue to contribute

annually, what rate of interest do you need to earn (per year) to get you the closest to saving $1.5 million for retirement

at the age of 55 (you are shooting for an early retirement)?

A. 14.9%

B. 17.0%

C. 14.2%

Feedback: $2000(F/A,i,34) = $1.5M

D. 13.0%

Answer Key: A

EIN4354 Module 9

An aerospace company needs to raise capital for new expenditures. It plans to sell 10,000 10-year bonds, each with

face value of $10,000, to the public. The coupon rate will be 8% (annual) with payments made semi-annually. However,

due to the strength of the company, it will offer the bonds at a premium of $10,300 each. What is the annual yield to

maturity of this bond?

A. 3.78%

Feedback: Find the annual rate!

B. 8.00%

C. 7.71%

D. 7.56%

Answer Key: C

Part 2 of 4 - Question 2 5.0 Points

Rayong Refinery PCL signed a loan agreement for THB13.2 billion (Thai baht) from Thai Bank, Siam Commercial Bank,

Government Savings Bank, and TMB Bank. If this loan is to be repaid with 10 equal semi-annual payments, and the

interest rate is 4.5% compounded semi-annually, what is the size of the second payment?

A. $1320M

Feedback: Using Excel: =PMT(0.0225,2,10,13.2)

B. $1489M

C. $270M

D. $1219M

Answer Key: B

Part 3 of 4 - Question 3 5.0 Points

A telecommunications firm intends to take a $100 million loan from the bank. The loan is to be paid back in monthly

payments of $2,347,616 over a 5-year period. What is the true cost (annual rate) of the loan?

A. 15.4%

B. 1.2%

C. 12.0%

i_m = 1.2%

i_a = (1.012)^12 - 1 = 15.4%

D. 12.7%

Answer Key: A

Part 4 of 4 - Question 4 5.0 Points

Microsoft stock has split nine times since being sold to the public for $21 per share on March 14 of 1986. The history

of splits is: September 18, 1987 (2-for-1); April 12, 1990 (2-for-1); June 26, 1991 (3-for-2); June 12, 1992 (3-for-2); May

20, 1994 (2-for-1); December 6, 1996 (2-for-1); February 20, 1998 (2-for-1); March 26, 1999 (2-for-1); and February 14,

2003 (2-for-1). Suppose you purchased 10 shares on that opening day for $28 per share (the price jumped quickly after

opening). If you sell all of your shares for $28 per share on March 14, 2011, what is the (annual) return on your

investment? Ignore any dividends during that time.

A. 25.4%

Feedback: 10($28) = 288(10)($28)(P/F,i,25)

B. 22.1%

C. 32.2%

D. 27.9%

Answer Key: A

EIN4354 Module 1

Alter Trading purchased a scrap metal shredder from Metso Oyj of Finland. If a 9,000-ton machine cost $5.4 million in

2006, estimate the cost of a 27,000-ton, machine to be purchased in 2009. Assume a capacity power factor of 0.7 and

note that the relevant cost index has risen from 254 in 2006 to 289 in 2009.

A. $12.9M

B. $13.3M

Feedback: $5.4M[(27,000/9,000)^(0.7)](289/254)

C. $16.2M

D. $11.7M

Answer Key: B

Part 2 of 4 - Question 2 5.0 Points

A new company wants to join the supercomputer market and believes that they can turn a profit after selling five

computers (these are large ticket items). If they estimate that it will take 150 hours to assemble the first computer, how

much time will it take them to assemble the fifth computer assuming a 25% reduction in production time with every

doubling in output?

A. 84.3 hours

B. 150 hours

C. 76.9 hours

D. 47.5 hours

Feedback: 150(5^(log(.75)/log(2)))

Answer Key: C

Part 3 of 4 - Question 3 5.0 Points

Question 3 of 4 5.0 Points

You and your engineering friends decide to start a small consulting firm. You secure two loans: One for $50,000 at

6.5% per year and one for $100,000 at 2.2% per quarter. What is your company's cost of capital?

Feedback: ((1.022)^4-1)($100K/$150K) + (0.065)($50K/$150K)

Answer Key: A

Part 4 of 4 - Question 4 5.0 Points

Sony announced that it would invest $400 million to increase its production of lithium ion batteries used in small

electronics by 33 million per month (or 396 million per year). If the expansion takes one year and lasts for five years

(with a salvage value of $10 million) and each battery generates $1.5 in profits (revenues minus costs), the present

value of the investment is $1.38 billion (20% annual interest rate used for discounting). Which of the following

statements is true?

A. A 20% decrease in the length of the project leads to a 14% decrease in the present value of the project.

B. A 20% increase in the length of the project leads to a 14% increase in the present value of the project.

C. A 20% increase in the length of the project leads to a 14% decrease in the present value of the project.

D. A 20% decrease in the length of the project leads to a 14% increase in the present value of the project.

Answer Key: B

EIN4354 Module 1

Brightoil Petroleum is looking to purchase 8 ocean vessels, each with average capacity of 110,000 deadweight tons

(DWT). If a ship with a capacity of 50,000 DWT cost $30 million in 2000, estimate the price of a 110,000 DWT ship in

2010. Assume a capacity power factor of 0.6 and note that the shipbuilding cost index has risen from 120.0 in 2000 to

185.7 in 2010.

A. $66.0M

B. $48.2M

C. $39.6M

D. $74.5M

Feedback: $30M[(110,000/50,000)^(0.6)](185.7/120)

Answer Key: D

Part 2 of 4 - Question 2 5.0 Points

A new company wants to join the supercomputer market and believes that they can turn a profit after selling five

computers (these are large ticket items). If they estimate that it will take 150 hours to assemble the first computer, how

much time will it take them to assemble the first five computers assuming a 15% reduction in production time with

every doubling in output?

A. 604.7

hours

B. 750.0

hours

C. 556.3

hours

hours 150(2^(log(.85)/log(2))) +

150

Answer Key: A

Part 3 of 4 - Question 3 0.0 Points

You and your engineering friends decide to start a small consulting firm. You secure two loans: One for $200,000 at

5% per year and one for $300,000 at 2.5% per six months. What is your company's cost of capital?

A. 5.04%

B. 3.5%

C. 7.5%

D. 3.75%

Answer Key: A

Part 4 of 4 - Question 4 5.0 Points

Sony announced that it would invest $400 million to increase its production of lithium ion batteries used in small

electronics by 33 million per month (or 396 million per year). If the expansion takes one year and lasts for five years

(with a salvage value of $10 million) and each battery generates $1.5 in profits (revenues minus costs), the present

value of the investment is $1.38 billion (20% annual interest rate used for discounting). Which of the following

statements is true?

A. A 10% decrease in the investment cost leads to a 2.9% increase in the present value of the project.

B. A 10% increase in the investment cost leads to a 5.8% decrease in the present value of the project.

C. A 10% decrease in the investment cost leads to a 2.9% decrease in the present value of the project.

D. A 10% increase in the investment cost leads to a 2.9% increase in the present value of the project.

Answer Key: A

EIN4354 Module 1

Your consulting firm earns income of $220,000 in a given year. The state tax rate is 2.2% and the federal tax rate is

paid according to the following schedule (there are no other taxes). How much, in total, does the firm pay in taxes?

$1 to $50,000 15%

$50,001 to $75,000 25%

$75,001 to $100,000 34%

$100,001 to $335,000 39%

$335,001 to $10M 34%

$10,000,001 to $15M 35%

$15,000,001 to $18,333,333 38%

Over $18,333,333 35%

A. $85,800

B. $69,050

Feedback: Don't forget the state taxes!

C. $72,371

D. $73,890

Answer Key: C

Part 2 of 5 - Question 2 4.0 Points

Alter Trading purchased a shredding machine for scrap metal for its operations in Mobile, Alabama from Metso Oyj of

Finland. Assume the machine cost $7 million and is depreciated as a 5-year asset using MACRS. If the machine is sold

after two years of use, what is the book value of the machine at the time of the sale?

1 20.00%

2 32.00%

3 19.20%

4 11.52%

5 11.52%

6 5.76%

A. $3.36M

Feedback: Don't forget the half-year convention!

B. $2.24M

C. $2.52M

D. $4.48M

Answer Key: D

Part 3 of 5 - Question 3 4.0 Points

Lockheed Martin won a contract to build and launch a satellite for Vietnam Posts and Telecommunications Group at

the cost of $300 million. Assume the satellite is to be depreciated over an 8-year period. Using 1.5-declining balance,

what is the book value after year three?

A. $127 million

B. $187 million

C. $161 million

Feedback: $300M - ($56.25M + $45.7M + $37.13M)

D. $140 million

Answer Key: C

Part 4 of 5 - Question 4 4.0 Points

The Chilean flagship carrier LAN agreed to purchase a number of Boeing 787-8 Dreamliner aircraft to increase its fleet.

Assume one jet costs $280 million and can be depreciated over 6 years. If double-declining balance switching to

straight-line is used, what is the depreciation amount in year 6?

A. $18.4 million

B. $27.7 million

C. $47.0 million

D. $41.5 million

Feedback: Using Excel: =VDB(280,0,6,5,6,2.0,0)

Answer Key: B

Part 5 of 5 - Question 5 4.0 Points

A. Straight-line depreciation defines a lesser amount of depreciation in the final year than double-declining

balance switching to straight-line depreciation.

B. Double-declining balance depreciation defines a greater amount of depreciation in the first year when

compared to double-declining balance switching to straight-line depreciation.

C. Double-declining balance depreciation defines a lesser book value at the end of the recovery period than

double-declining balance switching to straight-line depreciation.

D. Straight-line depreciation defines a book value at the end of the recovery period that is equal to that of

double-declining balance switching to straight-line depreciation.

Answer Key: D

EIN4354 Module 1

Alcan invested $42.6 million in a new packaging facility in North Carolina in 2005, with production beginning in 2006. If

the plant is to be depreciated over 10 years using straight-line depreciation with the half-year convention, sales are to

generate $50 million in revenues per year, and operating and maintenance costs are $35 million per year, what is the

after-tax cash flow from the first year of operations for the facility? Assume an effective tax rate of 35% and the facility

will operate for 15 years (no salvage value).

A. $6.98M

B. $9.75M

C. $10.50M

Feedback: .65($50M) - .65($35M) + .35($4.26M/2)

D. $8.37M

Answer Key: C

Question 2 of 4 5.0 Points

Alcan invested $42.6 million in a new packaging facility in North Carolina in 2005, with production beginning in 2006. If

the plant is to be depreciated over 10 years using straight-line depreciation with the half-year convention, sales are to

generate $50 million in revenues per year, operating and maintenance costs are $35 million per year, and there is no

salvage value, what is the after-tax cash flow from the 11th year of operations for the facility? Assume an effective tax

rate of 35% and the facility will operate for 15 years (no salvage value).

A. $8.37M

B. $6.98M

C. $10.50M

Feedback: .65($50M) - .65($35M) + .35($4.26M/2)

D. $9.75M

Answer Key: C

Part 2 of 2 - Question 2 10.0 Points

Siemens AG announced a $450 million contract to supply equipment and operating and maintenance services for a

natural-gas-fired plant on Long Island. The combined cycle power plant will provide a capacity of up to 350 megawatts

of electricity to the Long Island Power Authority starting in 2009.

1 5.00% 9 5.91%

2 9.50% 10 5.90%

3 8.55% 11 5.91%

4 7.70% 12 5.90%

5 6.93% 13 5.91%

6 6.23% 14 5.90%

7 5.90% 15 5.91%

8 5.90% 16 2.95%

Assume that $350 million of the contract relates to the equipment and its installation. According to MACRS rules, this

equipment is classified with a 15-year recovery period. The 15-year MACRS percentages are listed here. Assume the

plant is installed in 2009 and operates for six years before being sold to another power distributor for the cost of $217

million. What is the after-tax cash flow for the sale, assuming a 38% effective tax rate? (Any losses are assumed to

generate tax credits, treated as positive revenue.)

A. $220M

B. $213M

C. $217M

Feedback: Remember the taxes.

D. $207M

Answer Key: B

Question 4 of 4 5.0 Points

Siemens AG announced a contract to supply equipment and operating and maintenance services for a natural-gas-

fired plant on Long Island. The combined cycle power plant will provide a capacity of up to 350 megawatts of electricity

to the Long Island Power Authority starting in 2009.

1 5.00% 9 5.91%

2 9.50% 10 5.90%

3 8.55% 11 5.91%

4 7.70% 12 5.90%

5 6.93% 13 5.91%

6 6.23% 14 5.90%

7 5.90% 15 5.91%

8 5.90% 16 2.95%

Assume that $350 million of the contract relates to the equipment and its installation. According to MACRS rules, this

equipment is classified with a 15-year recovery period. The 15-year MACRS percentages are listed here. Assume the

plant is installed in 2009 and operates for five years before being sold to another power distributor for the cost of $217

million. What is the after-tax cash flow for the sale, assuming a 38% effective tax rate? (Any losses are assumed to

generate tax credits, treated as positive revenue.)

A. $225M

B. $217M

$217M - .38(-$13.2M) = $222M

D. $230M

Answer Key: C