Question 1

Explain the difference between an increase in average price level and an increase in relative prices in economic evaluation of engineering projects.

Accepted Answer

The answer of Explain the difference between an increase in...

Question 2

If Tonya as a municipal engineer evaluates a project which is subject to the effect of inflation, she should

Accepted Answer

A) work with nominal values for cash flows and nominal interest rates. 
B) work with real values for cash flows and nominal interest rates. 
C) work with nominal values for cash flows and real interest rates. 
D) work with constant values for cash flows and current interest rates. 
E) rely on forecast of future interest rates and cash flows in real or nominal terms.

Question 3

A municipality issued bonds to finance its infrastructure projects. The bonds are supposed to pay 6.5% per year. A city engineer calculated the real rate of interest to be 3.5% next year. What inflation rate did the engineer assume?

Accepted Answer

A) 2.7% 
B) 2.9% 
C) 4.8% 
D) 9.2% 
E) 22.2%

Question 4

XWave Ltd. has spent $150 000 for the retraining of its personnel this year, and decided to repeat the retraining every third year. How much will this retraining cost next time if annual inflation is going to be 4% over the next five years?

Accepted Answer

A) $162 450 
B) $168 730 
C) $169 780 
D) $171 216 
E) $174 549

Question 5

The purchase of a car requires a $25 000 loan to be repaid in monthly installments for four years at 12% annual real interest rate. If annual inflation rate is 4%, find the amount paid, in actual dollars, in the 20th month.

Accepted Answer

The answer of The purchase of a car requires a...

Question 6

How should engineers deal with the fact that inflation rates are very difficult to predict?

Accepted Answer

A) Avoid any projects that involve cash flows occurring more than two years in the future. 
B) Obtain estimates of inflation from expert economists. 
C) Assume that inflation rates will average out to zero over the project life. 
D) Base project analysis on the highest rates of inflation that have occurred in the last ten years. 
E) Perform a sensitivity analysis on the profitability of the project for different inflation rates.

Question 7

I invested a sum of money in a project five years ago. The rate of inflation since then has been 5% per year. Now I receive a return of $5 000 on my original investment. I calculate that my real rate of return on the original investment has been 10%. What was the size of my original investment?

Accepted Answer

A) $2 435 
B) $3 105 
C) $3 918 
D) $3 962 
E) $6 309

Question 8

A municipality issued bonds to finance its infrastructure projects. The bonds pay 6.5% per year. If expected annual inflation is 3.5%, what is the real rate of return on these bonds?

Accepted Answer

A) 2.90% 
B) 3.00% 
C) 3.50% 
D) 6.50% 
E) 10.23%

Question 9

A four-year project requires $1 000 000 as the first cost and brings $2 000 000 at the end of the fourth year. If expected annual inflation over this period is 5%, what is the real IRR of this project?

Accepted Answer

A) 13.3% 
B) 18.9% 
C) 27.6% 
D) 47.6% 
E) 95.0%

Question 10

The inflation rate is 10%. A project will yield $1 000 in real dollars at the end of two years. How many actual dollars will it yield?

Accepted Answer

A) $900 
B) $909 
C) $1 100 
D) $1 110 
E) can't tell unless we know the MARR

Question 11

The cost of one of the following products has changed very differently from the others over time. Which is the odd one out?

Accepted Answer

A) food 
B) clothing 
C) computers 
D) oil 
E) housing

Question 12

I am considering a project which requires an immediate investment of $10 000 and yields a return in two years. If I expect the rate of inflation to be 15%, how big, in actual dollars, must the return be if my real rate of return on the project is to be 20%?

Accepted Answer

A) $13 500 
B) $13 800 
C) $14 400 
D) $18 225 
E) $19 044

Exam 9: Inflation