CEE Exam 2
An economic evaluation of the following mutually exclusive alternatives is being conducted. Since they have different service lives, repeatability is assumed and an analysis period of 18 years is used. The MARR is 10%. Alternative A Alternative B Initial cost $35,000 $120,000 Annual revenues $25,000 $40,000 Service life (years) 6 9 1.(1) The net AW of Alternative B over the analysis period is (select the closest value) 2.The net PW of Alternative B over the analysis period is (select the closest value)
1. $19163 2.$157164
An economic evaluation of the following mutually exclusive alternatives is being conducted. Since they have different service lives, repeatability is assumed and an analysis period of 18 years is used. The MARR is 12%. Alternative A Alternative B Initial cost $30,000 $120,000 Annual revenues $15,000 $35,000 Service life (years) 6 9 Answer the following two questions (1) The net AW of Alternative A over the analysis period is (select the closest value) (2) The net PW of Alternative A over the analysis period is (select the closest value)
1.$7,703 2.55,844
Given the following information for a project: initial capital cost = $900,000; annual revenues = $60,000 and annual costs = $15,000; its simple payback period is most nearly equal to
20 years
Two mutually exclusive investment projects with service lives of 8 and 12 years are being compared. Using the repeatability assumption, which of the following is the most reasonable common analysis period to be used in the analysis.
24 years
The following four alternative investments are being compared at MARR of 12%. Which investment is the most economical over the service life? Alt. E Alt. Q Alt. L Alt. S
Alt E because it has the highest net PW
The following two alternative investments are being evaluated at a MARR of 12%. Alt. P Alt. Q Alt. Q versus P
Alt P is more economical because the incremental B/C ratio is < 1
The following mutually exclusive alternative investments are being compared at MARR of 12%. Alt. X Alt. Y Service life (years) 10 10 Net AW $534,000 $422,000 IRR 13.4% 16.2% Which of the two investments is more economical:
Alt X because it has a higher net AW
The following mutually exclusive alternative investments are being compared at MARR of 10%. X Y Y versus X Initial cost $250,000 $400,000 $150,000 Service life (years) 10 10 10 IRR 17.2% 15.1% 11.5% Which of the two investments is more economical:
Alt Y because the incremental IRR > MARR
The following two mutually exclusive alternative investments with different service lives are being compared at MARR of 6%. Alt. W Alt. V Service life (years) 15 20 Net PW (over service life) $1,834,000 $2,312,000 Net AW (over service life) $249,182 $238,050 Based on the information given, which of the two investments is more economical?
Alt. W because it has a higher net AW
The table below summarizes the comparison between four mutually exclusive alternatives using the IRR method. The MARR is 10%. Which alternative should be the base alternative in the first step of the incremental analysis? Alternative P Q R S Initial Cost $110,000 $130,000 $95,000 $354,000 Annual Income $21,500 $31,200 $20,000 $74,000 IRR 14.5% 20.2% 16.5% 16.3%
Alternative R because it has the lowest initial cost
A project with a higher net PW than a competing project of the same service life will also always have a higher B/C ratio.
False
Although changing the value of MARR changes the values of the PW of alternatives being compared, it never changes the relative rankings of the alternatives in terms of their economic preference.
False
For selecting between mutually exclusive projects, the net PW of the projects over their respective service lives can be compared directly and used to make recommendations even if the projetcs have different service lives, as long as the repeatability assumption is made.
False
If project A has a higher PW than project B at MARR = i, then project A will always have a higher PW than B for all values of MARR ≥i.
False
When comparing mutually exclusive alternatives with the same service lives, the alternative with the highest IRR value is always the most economical.
False
When comparing mutually exclusive alternatives with the same service lives, the alternative with the highest B/C ratio is always the most economical.
False
If the IRR of project A is IRR(A), and that of a higher cost project B is IRR(B), then project B will be preferred over A if the incremental IRR is greater than:
MARR
(2) Given that the internal rate of return for project X is IRR(X) and that of higher ranked project Y is IRR(Y), then project Y will be preferred over X if the incremental rate of return is greater than.
MARR
(1) Given that the benefit/cost ratio for project X is B/C(X) and that of higher ranked project Y is B/C(Y), then project Y will be preferred over X if the incremental benefit/cost ratio is greater than
One
An investment project is more economical than the "do nothing" alternative if its B/C ratio calculated at the desired MARR over its service life is
greater than one
An investment project is more economical than the "do nothing" alternative if its net PW calculated over its service life is
greater than zero
If , for a given value of MARR, Alternative A has a higher net PW than Alternative B with the same service life, then Alternative A should also have a net AW.
higher
For projects with the same service lives, If the net PW over the service life for project A is higher than that of project B, then the net AW of project A will be _________ that of B.
higher than
One of the shortcomings of using the discounted payback period to select alternatives is that
it ignores all the cash flows beyond the payback period
An alternative investment with a higher net PW compared to a competing alternative with the same lifetime, will also have a higher IRR.
sometimes, not always
In computing the IRR for a project by trial-and-error method, at i = 9%, net PW = -$100, and at i = 10%, the net PW = $50. What is the best estimate for the IRR?
9.67% USE NOTES EQUATION
Changing the value of MARR used in comparing several alternatives may change the rankings of the alternatives in terms of their economic preference.
True
Comparing several mutually exclusive alternative investments over the same analysis period using the net present worth method will result in the same recommendation as comparing them using the net annual worth method.
True
For selecting between mutually exclusive projects, the net AW of the projects over their respective service lives can be compared directly and used to make recommendations even if the projects have different service lives, as long as the repeatability assumption is made.
True
Using the incremental IRR method for comparing alternatives always results in the same economically preferred alternative as using the PW method.
True
Using the incremental B/C ratio method for economic comparizons of mutually exclusive alternatives gives the same results as using the net AW method.
True
When comparing mutually exclusive alternatives with the same service lives, the alternative with the highest net PW value is the most economical alternative
True
When selecting projects based on the payback period method, a project with a shorter payback period is generally preferred.
True
The table below summarizes the comparison between four mutually exclusive alternatives using the IRR method. The MARR is 15%. Step 1 of the incremental analysis has been done as shown. Which two alternatives should be compared in Step 2? Alternative V W X Y Step 1 W vs V Step 2 ? Initial Cost $80,000 $130,000 $220,000 $354,000 $50,000 Annual Income $21,500 $31,200 $46,500 $74,000 $9,700 IRR 23.7% 20.2% 16.6% 16.3% 14.3%
X vs V
A county director of public works is evaluating a project with the following cash flows: Initial cost = $100,000; Annual benefits = $80,000; Annual costs = $20,000; and a service life of 20 years with a salvage value of $20,000. The county uses a MARR is 4% for its economic analysis. 1.(a) The conventional B/C ratio for the project is equal to (b) The modified B/C ratio for the project is equal to
a. 3.00 b. 8.97
