Question 1

As a rule, potential values of a random variable in a decision tree are represented by

Accepted Answer

A) chance nodes. 
B) decision nodes. 
C) terminal positions. 
D) branches. 
E) links. 
A) chance nodes. 
B) decision nodes. 
C) terminal positions. 
D) branches. 
E) links. A

Question 2

A firm decides to invest $5 million in a new food processing plant. The plant has an expected life of 20 years with expected sales of 6 million cans of food per year. Fixed annual costs are $2 million and annual variable costs are $1 per can. The product will be priced at $2 per can. Corporate tax rate is 40%, and the MARR is 10%. Ignoring tax impacts on the first cost, what is the project's PW under the base case scenario?

Accepted Answer

A) $25.6 million 
B) $15.4 million 
C) $46.1 million 
D) $20.4 million 
E) $29.0 million 
A) $25.6 million 
B) $15.4 million 
C) $46.1 million 
D) $20.4 million 
E) $29.0 million B

Question 3

In general, an increase in salvage value ________ and an increase in the interest rate ________ the present worth of a project.

Accepted Answer

A) increases, increases 
B) increases, decreases 
C) decreases, increases 
D) decreases, decreases 
E) does not change, decreases 
A) increases, increases 
B) increases, decreases 
C) decreases, increases 
D) decreases, decreases 
E) does not change, decreases B

Question 4

A decision tree of a project is given as follows:   What is the expected value of alternative B?

Accepted Answer

A) $0 
B) $4.5 
C) $5.0 
D) $5.2 
E) $10.0 
A) $0 
B) $4.5 
C) $5.0 
D) $5.2 
E) $10.0

Question 5

First cost of a construction project depends on weather. Historical weather data shows that in the fall weather is warm 20% of the time, it is cold 30% of the time and it is somewhat in between 50% of the time. During warm weather, first cost is expected to be $225 000, during cold weather $295 000 and $250 000 in between. What is the expected value of the first cost?

Accepted Answer

A) $225 000 
B) $250 000 
C) $252 000 
D) $258 500 
E) $295 000 
A) $225 000 
B) $250 000 
C) $252 000 
D) $258 500 
E) $295 000

Question 6

A manager of a manufacturing enterprise is considering whether to produce an intermediate good in house or to buy it from another firm. If the good is produced in house, three potential outcomes are possible: (i)if production is done in one shift, then expected profit is -$30 000 per year, (ii)if production is done in two shifts, then expected profit is $10 000, and (iii)if production is done in three shifts, then expected profit is $55 000. Probabilities associated with these outcomes were estimated as 35%, 45% and 20% respectively. However, if the good is purchased, two potential outcomes arise: (i)on-time delivery of the good results in $20 000 of expected profit, (ii)delays in delivery result in an expected loss of -$17 000. Probabilities of these outcomes are 60% and 40% respectively. Draw a decision tree, and execute it to make a decision.

Accepted Answer

The tree looks like this: @#IMG-DLM& The expected

Question 7

A decision tree of a project is given as follows:   What is the expected value of alternative A?

Accepted Answer

A) $4.98 
B) $5.08 
C) $5.91 
D) $8.83 
E) $9.66 
A) $4.98 
B) $5.08 
C) $5.91 
D) $8.83 
E) $9.66

Question 8

A pie company has two employees who each earn $30 000 a year, and it pays $10 000 rent every year. The ingredients for a pie, including the gas to cook it, cost $10 per pie. If the company is taxed at 50% and pies are sold at $20 each, the break-even point for the company (calculated after-tax)is

Accepted Answer

A) 3 500 pies. 
B) 4 000 pies. 
C) 6 000 pies. 
D) 7 000 pies. 
E) 8 000 pies. 
A) 3 500 pies. 
B) 4 000 pies. 
C) 6 000 pies. 
D) 7 000 pies. 
E) 8 000 pies.

Question 9

Suppose a discrete random variable X can take on these values with the following probabilities:   What is the mean of the discrete random variable X?

Accepted Answer

A) 0.25 
B) 0.50 
C) 0.75 
D) 1.00 
E) 1.25 
A) 0.25 
B) 0.50 
C) 0.75 
D) 1.00 
E) 1.25

Question 10

You are offered a chance to buy a ticket in a lottery. You have a one in ten chance of winning this lottery. If you win, your name will be entered along with 399 other winners as an entrant in a second lottery. All the entrants in the second lottery have an equal chance of winning the single prize, a sportscar valued at $400 000. What is the most it would be rational for you to pay for a ticket in the first lottery?

Accepted Answer

A) $10 
B) $40 
C) $100 
D) $400 
E) $1 000 
A) $10 
B) $40 
C) $100 
D) $400 
E) $1 000

Question 11

NB TECH is evaluating a dam-building project. The following estimates for probable cashflows were obtained:
   NB TECH uses a discount rate of 5%. If the life of a dam is 10 years and it has no salvage value thereafter, should it be built?

Accepted Answer

It is necessary to calculate the expecte

Question 12

The host of a TV show offers you a choice of ten closed boxes. Some of them contain money, some are empty. The total amount of money in them is $1 000. The host offers, for a price, to tell you how many are empty. How much is this offer worth?

Accepted Answer

A) It's not worth anything. 
B) $10 
C) $12.50 
D) $100 
E) $250 
A) It's not worth anything. 
B) $10 
C) $12.50 
D) $100 
E) $250

Question 13

A decision tree of a project is given as follows:   What is the equivalent decision tree?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
E) 
  
A) 
  
B) 
  
C) 
  
D) 
  
E)

Question 14

COOR Ltd. is buying a new sewing machine for $9 000. It can be sold at the end of its 10 year service life for $800. The firm's MARR is 10%. What is the minimum annual savings that the machine must yield in order to break even on the investment?

Accepted Answer

A) $2 012 
B) $1 415 
C) $1 815 
D) $1 212 
E) $1 692 
A) $2 012 
B) $1 415 
C) $1 815 
D) $1 212 
E) $1 692

Question 15

In general, sensitivity analysis can be described as

Accepted Answer

A) establishing the range of variations in the key parameters of a project. 
B) gaining a better understanding of how cash flows affect a project's performance. 
C) predicting profitability of a project. 
D) establishing the impacts of uncertainty in a project's inputs on its economic performance. 
E) establishing the level of data errors. 
A) establishing the range of variations in the key parameters of a project. 
B) gaining a better understanding of how cash flows affect a project's performance. 
C) predicting profitability of a project. 
D) establishing the impacts of uncertainty in a project's inputs on its economic performance. 
E) establishing the level of data errors.

Question 16

You are experimenting with a new process for manufacturing high-energy-density batteries. Your technical staff tell you that the process should only produce 25% defectives. However, the first three batteries produced by the process all turn out to be defective. What are the odds on this happening if your technical staff are telling the truth?

Accepted Answer

A) 1.6% 
B) 8.3% 
C) 12.5% 
D) 18.6% 
E) 22% 
A) 1.6% 
B) 8.3% 
C) 12.5% 
D) 18.6% 
E) 22%

Question 17

The expected value of the present worth of an engineering project is $103 015. It was evaluated on the basis of the following information on four potential outcomes:
   If annual interest rate is 10%, and all the alternatives have equal probabilities of occurring, what is the annual savings under Alternative I?

Accepted Answer

Since all the alternatives have the same

Question 18

BC Power has just purchases a $0.5 million turbine. The turbine will allow it to produce 10 000 kilowatt hours (KWH)of electricity per day for twenty years. Afterwards the turbine's scrap value is expected to be negligible. Current price of electricity is $0.06/KWH. Operating costs of the turbine are $100 000 per year. Now BC Power pays a 40% corporate tax rate on its annual income. Depending on the outcome of the provincial elections, it is expected that the tax rate can either increase by 10% or decrease by 10%. Given this information and assuming a 5% annual interest rate and a 20% CCA rate, perform a sensitivity analysis on the company's after-tax profit in the turbine's first year of operation with respect to the expected changes in the corporate tax rate.

Accepted Answer

First, it is necessary to evaluate the b

Question 19

A new technological line to produce shoes is being designed. It costs $100 000 and operating costs are expected to be $30 000 per year. Planned annual production is 800 pairs and the price of a pair of shoes is $80. The line's service life is five years, the depreciation rate is 20%. Assuming a 10% annual interest rate for the base case, perform a sensitivity analysis with respect to the interest rate in the interval [-20%, +20%] in terms of present worth. Comment on your results briefly.

Accepted Answer

Let us first evaluate the base case. In

Question 20

In a sensitivity graph that examines the present worth of a project, the slope of a line shows

Accepted Answer

A) how sensitive a project's benefit-cost ratio is to changes in its inputs: the steeper, the more sensitive. 
B) how sensitive a project's PW is to changes in its inputs: the steeper, the more sensitive. 
C) how sensitive a project's benefit-cost ratio is to changes in its inputs: the flatter, the more sensitive. 
D) how sensitive a project's PW is to changes in its inputs: the flatter, the more sensitive. 
E) how sensitive the project's IRR is to changes in its inputs: the flatter, the more sensitive. 
A) how sensitive a project's benefit-cost ratio is to changes in its inputs: the steeper, the more sensitive. 
B) how sensitive a project's PW is to changes in its inputs: the steeper, the more sensitive. 
C) how sensitive a project's benefit-cost ratio is to changes in its inputs: the flatter, the more sensitive. 
D) how sensitive a project's PW is to changes in its inputs: the flatter, the more sensitive. 
E) how sensitive the project's IRR is to changes in its inputs: the flatter, the more sensitive.

As a rule, potential values of a random variable in a decision tree are represented by

In general, an increase in salvage value and an increase in the interest rate the present worth of a project.

A decision tree of a project is given as follows: What is the expected value of alternative B?

A decision tree of a project is given as follows: What is the expected value of alternative A?

A pie company has two employees who each earn $30 000 a year, and it pays $10 000 rent every year. The ingredients for a pie, including the gas to cook it, cost $10 per pie. If the company is taxed at 50% and pies are sold at $20 each, the break-even point for the company (calculated after-tax)is

Suppose a discrete random variable X can take on these values with the following probabilities: What is the mean of the discrete random variable X?

NB TECH is evaluating a dam-building project. The following estimates for probable cashflows were obtained: NB TECH uses a discount rate of 5%. If the life of a dam is 10 years and it has no salvage value thereafter, should it be built?

The host of a TV show offers you a choice of ten closed boxes. Some of them contain money, some are empty. The total amount of money in them is $1 000. The host offers, for a price, to tell you how many are empty. How much is this offer worth?

A decision tree of a project is given as follows: What is the equivalent decision tree?

COOR Ltd. is buying a new sewing machine for $9 000. It can be sold at the end of its 10 year service life for $800. The firm's MARR is 10%. What is the minimum annual savings that the machine must yield in order to break even on the investment?

In general, sensitivity analysis can be described as

In a sensitivity graph that examines the present worth of a project, the slope of a line shows

Engineering Decision Making

Time Value of Money

Cash Flow Analysis

Comparison Methods: Part I

Comparison Methods: Part Ii

Financial Accounting and Business Plans

Replacement Decisions

Taxes

Inflation

Public Sector Decision Making

Project Management

Filters

Exam 12: Dealing With Uncertainty and Risk

As a rule, potential values of a random variable in a decision tree are represented by

In general, an increase in salvage value ________ and an increase in the interest rate ________ the present worth of a project.

A decision tree of a project is given as follows: What is the expected value of alternative B?

A decision tree of a project is given as follows: What is the expected value of alternative A?

A pie company has two employees who each earn $30 000 a year, and it pays $10 000 rent every year. The ingredients for a pie, including the gas to cook it, cost $10 per pie. If the company is taxed at 50% and pies are sold at $20 each, the break-even point for the company (calculated after-tax)is

Suppose a discrete random variable X can take on these values with the following probabilities: What is the mean of the discrete random variable X?

NB TECH is evaluating a dam-building project. The following estimates for probable cashflows were obtained: NB TECH uses a discount rate of 5%. If the life of a dam is 10 years and it has no salvage value thereafter, should it be built?

The host of a TV show offers you a choice of ten closed boxes. Some of them contain money, some are empty. The total amount of money in them is $1 000. The host offers, for a price, to tell you how many are empty. How much is this offer worth?

A decision tree of a project is given as follows: What is the equivalent decision tree?

COOR Ltd. is buying a new sewing machine for $9 000. It can be sold at the end of its 10 year service life for $800. The firm's MARR is 10%. What is the minimum annual savings that the machine must yield in order to break even on the investment?

In general, sensitivity analysis can be described as

In a sensitivity graph that examines the present worth of a project, the slope of a line shows

Engineering Decision Making

Time Value of Money

Cash Flow Analysis

Comparison Methods: Part I

Comparison Methods: Part Ii

Financial Accounting and Business Plans

Replacement Decisions

Taxes

Inflation

Public Sector Decision Making

Project Management

Filters

In general, an increase in salvage value and an increase in the interest rate the present worth of a project.