University of Ottawa
ECO 1192 ECO1192 Exam Workbook. Most Commonly Tested Questions, MCQ and Worked Solutions
1. The baseline for the acceptance or rejection of a project using the Present and Future
Worth methods is
a) MARR
b) Recovery period less than the industry threshold
c) $0
d) 1
e) None of these answers.
2. The baseline for the acceptance or rejection of a p
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1. The baseline for the acceptance or rejection of a project using the Present and Future
Worth methods is
a) MARR
b) Recovery period less than the industry threshold
c) $0
d) 1
e) None of these answers.
2. The baseline for the acceptance or rejection of a project using the Internal (IRR) and the
External (ERR) Rate of Return methods is
a) MARR
b) Recovery period less than the industry threshold
c) $0
d) 1
e) None of these answers.
3. If the rate of interest is 12% compounded quarterly, the effective (annual) rate of
interest is
a) 3%
b) 12%
c) 12.55%
d) None of these answers.
4. With the Present Worth Method, a common period of analysis must be used to
determine the economic validity of two projects with unequal lives.
a) True
b) False
5. With the Annual Equivalent Worth or Annuity Method (AEW), a common period of
analysis must be used to determine the better of two projects with unequal lives.
a) True
b) False
6. If the rate of interest is 12% compounded monthly, the actual (monthly) rate of interest
is
a) 12%
b) 12.68%
c) 1%
d) None of these answers.
7. A project with a negative annual equivalent worth (AEW) must have a negative internal
rate of return.
a) True
b) False
8. A project with a Net Present Worth (NPW) = $0 must have a rate of return
a) Less than MARR
b) Greater than MARR
c) Equal to MARR.
9. A nominal rate of interest will exceed its corresponding effective rate of interest when
a) simple interest (as opposed to compound interest) is used.
b) a project has an infinite life.
c) the effective rate of interest exceeds MARR.
d) None of these answers.
10. Which nominal (annual) rate of interest compounded semi-annually is equivalent to a
monthly rate of 1%?
a) 12%
b) 6%
c) 6.152%
d) None of these answers.
16. Project A’s Annual Equivalent Worth can be calculated from answer
a) -60,000(P/A,10%,5) + 30,000 -10,000 + 1,000(P/F,10%,5)
b) -60,000 + 30,000 -10,000 + 1,000(P/F,10%,5)
c) -60,000(A/P,10%,5) + 30,000 -10,000 + 1,000(A/F,10%,5)
d) -60,000 + 30,000 -10,000 + 1,000
e) None of these answers.
17. Project A’s Present Worth can be calculated from answer
a) -60,000(P/A,10%,5) + 30,000 -10,000 + 1,000(P/F,10%,5)
b) -60,000(A/P,10%,5) + (30,000 -10,000)(P/A,10%,5) + 1,000(P/F,10%,5)
c) -60,000 + (30,000 -10,000) + 1,000(P/F,10%,5)
d) -60,000 + (30,000 -10,000)(P/A,10%,5) + 1,000(P/F,10%,5)
e) None of these answers.
18. Project A’s Internal Rate of Return (i*) can be calculated from answer
a) -60,000(A/P,i*%,5) + (30,000 -10,000) + 1,000(A/F,i*%,5) = $0
b) -60,000 + 30,000 -10,000 + 1,000(P/F,i* = $0
c) -60,000 + (30,000 -10,000)(P/A,i*,5) + 1,000(P/F,i*,5) = $0
d) -60,000(F/P,i*,5) + (30,000 -10,000)(F/A,i*,5) + 1,000 = $0
e) Answers a), c) and d).
19. Project A’s External Rate of Return (i*) can be calculated from answer
a) -60,000(P/A,10%,5) + 30,000 -10,000 + 1,000(P/F,10%,5) = $0
b) -60,000(F/P,i*%,5) + (30,000 -10,000)(F/A,10%,5) + 1,000 = $0
c) -60,000 + (30,000 -10,000)(P/F,i*%,5) + 1,000(P/F,10%,5) = $0
d) -60,000(F/P,i*%,5) + (30,000 -10,000)(P/A,10%,5) + 1,000 = $0
e) None of these answers.
20. If the average recovery period for projects similar to Project A is 4 years, would Project A
be acceptable based on the Simple Payback Method?
a) Yes.
b) No.
c) Need for information to comment on Project A’s validity.
21. Project B’s Net Future Worth can be calculated from answer
a) -90,000(P/A,10%,10)+21,000-2,000(P/F,10%,10) + 500(P/G,10%,10)
b) -90,000(F/P,10%,10) - 2,000 + 21,000(F/A,10%,10) + 500(F/G,10%10)
c) -90,000(F/P,10%,10) - 2,000 + 21,000(F/A,10%,10) - 500(F/G,10%10)
d) -90,000-2,000(P/F,10%,10) + 21,000(P/A,10%,10) + 500(P/G,10%,10)
e) None of these answers.
22. A friend claims that Project B’s Internal Rate of Return (IRR) can be calculated from any
of the following equations:
A. -90,000(F/P,i*,10)+21,000(F/A,i*,10)-2,000+500(F/G,i*,10) = $0
B. -90,000+21,000(P/A,i*,10)-2,000(P/F,i*,10)+500(P/G,i*,10) = $0
C. -90,000(A/P,i*,10)+21,000-2,000(A/F,i*,10)+500(A/G,i*,10) = $0
Your view is that
a) Project B’s IRR can be calculated from equation A but not equations B and C.
b) Project B’s IRR can be calculated from equations A and C but not equation B.
c) Project B’s IRR can be calculated from equation C only.
d) Your friend is correct.
23. The incremental internal rate of return (ΔIRR) between projects A and B can be
calculated from answer
a) -60,000(A/P,i*,5) + (30,000 -10,000) + 1,000(A/F,i*,5)
= -90,000(A/P,i*,10) + 21,000 - 2,000(A/F,10%,10) + 500(A/G,i*,10)
b) -60,000 + (30,000 -10,000)(P/A,i*,5) + 1,000(P/F,i*,5)
= -90,000 + 21,000-2,000(P/F,i*,10) + 500(A/G,i*,10)
c) -60,000(F/P,i*,5) + (30,000 -10,000)(F/A,i*,5) + 1,000
= -90,000(F/P,i*,10)+21,000(F/A,i*,10)-2,000 + 500(F/G,i*,10)
d) -60,000(A/P,i*,5)(F/A,i*,10) + (30,000 -10,000)(F/A,i*,10) + 1,000{1+(F/P,i*,5)]
= -90,000+21,000(P/A,i*,10)-2,000(P/F,i*,10)-500(F/G,i*,10)}[1+(F/P,i*,5)]
e) None of these answers.
24. The incremental external rate of return (ΔERR) between projects A and B can be
calculated from answer
a) -60,000(F/P,i*,5) + (30,000 -10,000)(F/A,10%,5) + 1,000
= -90,000(F/P,i*,10)+21,000-2,000(A/F,10%,10) - 500(A/G,i*,10)
b) -60,000 + (30,000 -10,000)(P/A,10%,5) + 1,000(P/F,10%,5)
= -90,000(F/P,i*,10)+21,000-2,000(A/F,i*,10)+500(A/G,i*,10)
c) -60,000(A/P,i*,5) + (30,000 -10,000) + 1,000(A/F,10%,5)
= -90,000(A/P,i*,10)+21,000-2,000(A/F,i*,10)+500(A/G,i*,10)
d) -60,000{1+(P/F,10%,5)}(F/P,i*,10) + (30,000 -10,000)(F/A,10%,10) + 1,000{1+(F/P,10%,5)}
= -90,000(F/P,i*,10)+21,000(F/A,10%,10)-2,000+500(F/G,10%,10)
e) None of these answers
28. If a project’s Net Present Worth (NPW) is negative (< $0), its annual equivalent worth
(AEW) must be
a) greater than MARR
b) = MARR
c) greater than $0
d) less than $0.
29. You must select the best of 10 mutually exclusive projects using the incremental internal
rate of return method (ΔIRR). Before performing pair-wise project comparisons, you
a) must determine the validity of all (ten) projects.
b) must ensure that at least one project is valid.
c) need not bother verifying the validity of any of the projects since the “best” project is
simply the best of the whole lot.
30. Using the External Rate of Return Method (ERR), a common period of analysis is
required to determine the better of two mutually exclusive projects of different duration.
a) True
b) False
31. A project’s external rate of return (ERR) is the same whether calculated using the Net
Present Worth (NPW) Method or the Annual Equivalent Method (AEW).
a) True
b) False
32. A project found to be valid using the Simple Payback Method must also be valid based
on the Present Worth Method (PW)?
a) True
b) False
33. If MARR > 0%, a project’s recovery period will be shorter with the Discounted Payback
Method than with the Simple Payback Method?
a) True
b) False
34. The External Rate of Return method (ERR) assumes that the cash inflows generated by
a project will be reinvested at
a) a predetermined rate such as MARR
b) the project’s calculated external rate of return.
35. The baseline for accepting or rejecting a project using the simple payback method is
a) MARR
b) 1
c) $0
d) the project’s industry threshold (average duration or life).
36. If two (2) projects have identical (equal) recovery periods using the discounted payback method,
they must have the same Net Present Worth.
a) True
b) False
37. The Present Worth Method (PW) and the Discounted Payback Method are based on
a) profitability and liquidity criteria respectively
b) liquidity and equity criteria respectively
c) profitability and integrity criteria respectively.
d) opportunity and repeatability criteria respectively.
38. If a project’s annual equivalent worth (AEW) is $0, its internal rate of return must be
a) 0%
b) positive but less than MARR
c) greater than MARR
d) = MARR.
39. If IRR ˃ MARR, then IRR ˃ ERR ˃ MARR?
a) True
b) False
40. If IRR = MARR, then IRR = ERR = MARR?
a) True
b) False
41. Project A’s Net Present Worth can be calculated from answer
a) -60,000(P/A,10%,5)+[45,000/(0.1-0.15)][1-{1+0.15/1.1}5]-10,000+1,000(P/F,10%,5)
b) -60,000+[45,000/(0.1+0.15)][1-{1-0.15/1.1}5]-10,000(P/A,10%,5)+1,000(P/F,10%,5)
45. Project B’s AEW can be calculated from answer
a) -90,000(A/P,10%,10)+30,000-[9,000/(1+0.1)][1-{1+0.1/1.1}10] -2,000(A/F,10%,10)
b) -90,000(A/P,10%,10)+30,000-{10[9,000/1.1](A/P,10%,10)-2,000(A/F,10%,10)
c) -90,000(A/F,10%,10)+30,000-5[9,000/(0.1]-2,000(A/F,10%,10)
d) -90,000+(30,000-9,000)(P/A,10%,10)
e) None of these answers.
46. Project B’s IRR can be calculated from answer
a) -90,000(A/P,i*%,10)+30,000-[9,000/(1+i*]-2,000(A/F,i*%,10)=0
b) {-90,000-[9,000/(1+i*)]}(A/P,i*%,10)+30,000-2,000(A/F,i*%,10)=0
c) -90,000(A/F,i*%,10)+30,000-5[9,000/(0.i*]-2,000=0
d) -90,000(F/P,i*%,10)+30,000(F/A,i*%,10)-[9,000/(i*-0.1)][1-{(1+0.1)/(1+i*)}10](F/P,i*10) -2,000=0
e) None of these answers.
47. Project B’s ERR can be calculated from answer
a) -90,000(P/F,i*%,10)+30,000(F/A,10%,10)-[9,000/(0.1-0.1)][1-{1+0.1/1.1}10]-2,000=0
b) -90,000(F/P,i*%,10)+30,000(F/A,10%,10)-10[9,000/(1+0.1)](F/P,10%,10) -2,000=0
c) -90,000+30,000(P/A,10%,10)-5[9,000/(0.1]-2,000(P/F,10%,10)=0
d) -90,000+(30,000-9,000)(P/G,10%,10)-2,000(P/F,10%,10)=0
e) None of these answers.
48. A project with a B/C ratio > 1 must have a Net Present Worth (NPW) > $0.
a) True; b) False.
49. If the incremental B/C ratio for projects A and B exceeds 1, the incremental IRR (and the
incremental ERR) for projects A and B must exceed MARR.
a) True; b) False.
50. Harold deposits $500 annually (beginning one year from today) in a savings account
with interest of 10% compounded annually. Ten annual deposits are planned. Which
answer gives the Present Worth (i.e., t=0) of Harold’s account balance after the 10th
deposit?
a) PW = 500(P/A,10%,10)
b) PW = 500(F/A,10%,10)
c) PW = 500(A/P,10%,10)
d) PW = 500(A/F,10%,10)
e) PW = 500(A/G,10%,10)
51. Harold deposits $500 annually (beginning one year from today) in a savings account
with interest of 10% compounded annually. Ten annual deposits are planned. Which
answer gives the Annual Equivalent Worth (i.e., the annuity) of Harold’s account balance
after the 10th deposit?
a) AEW = 500(A/P,10%,10)
b) AEW = 500
c) AEW = 500(A/F,10%,10)
52. Harold deposits $500 annually (beginning NOW) in a savings account with interest of
10% compounded annually. Nine additional deposits are made at each yearend. Which
answer gives the Present Worth (PW) of Harold’s account balance after the 10th
deposit?
a) PW = 500(P/A,10%,10)
b) PW = 500(F/A,10%,10)
c) PW = 500+(P/A,10%,9)
d) PW = 500+(9)500
53. Harold deposits $500 annually (beginning NOW) in a savings account with interest of
10% compounded annually. Nine additional deposits are made at each yearend. Which
answer gives the Annual Equivalent Worth (i.e., the annuity) of Harold’s account balance
after the 10th deposit?
a) AEW = 500+ 500(A/P,10%,9)
b) AEW = 500
c) AEW = [500+(P/A,10%,9)](A/P,10%,10)
54. Harold deposits $500 at EOY1 increasing annually thereafter by $100 (i.e., $600 at
EOY2, $700 at EOY3 …) in a savings account with interest of 10% compounded
annually. Ten end-of-year deposits are planned. Which answer gives Harold’s account
balance after the 10th deposit?
a) FW = (10)500+100(F/A,10%,10)
b) FW = 500+100(F/G,10%,10)
c) FW = 500(F/A,10%,10)+100(F/G,10%,10)
d) FW = 500(F/G,10%,10)+(9)100
55. Harold deposits $500 at EOY1 increasing annually thereafter by $100 (i.e., $600 at
EOY2, $700 at EOY3 …) in a savings account with interest of 10% compounded
annually. Ten end-of-year deposits are planned. Which answer gives the Present Worth
(i.e., t=0) of Harold’s account balance after the 10th deposit?
a) PW = (10)500+100(P/A,10%,10)
b) PW = 500+100(P/G,10%,10)
c) PW = 500(P/A,10%,10)+100(P/G,10%,10)
d) PW = 500(P/G,10%,10)+(9)100
56. Harold deposits $500 at EOY1 increasing annually thereafter by $100 (i.e., $600 at
EOY2, $700 at EOY3 …) in a savings account with interest of 10% compounded
annually. Ten end-of-year deposits are planned. Which answer gives the Annual
Equivalent Worth of Harold’s account balance after the 10th deposit?
a) AEW = 500
b) AEW = 500+100(A/G,10%,10)
c) AEW = 500(A/P,10%,9)+100(A/G,10%,10)
d) AEW = (10)500(A/P,10%,10)
57. Harold deposits $500 at EOY1 increasing annually thereafter by 12% (i.e., $560 at
EOY2, $627.20 at EOY3 …) in a savings account with interest of 10% compounded
annually. Ten end-of-year deposits are planned. Which answer gives Harold’s account
balance after the 10th deposit?
a) FW = 500(F/A,10%,10)
1. A business should maintain accurate depreciation records of capital assets to
a) track the value of its fixed (physical) assets.
b) reflect all production costs in the price of its goods and services.
c) accurately determine its income tax credits or liabilities.
d) All of these answers.
2. A capital (physical) asset’s annual accounting depreciation is
a) equal to its purchase price less its total depreciation.
b) equal to its current market value less its total depreciation.
c) equal to its market value at the beginning of a year minus its market value
at the end of the year.
d) formula-based (straight line, declining balance, etc.)
e) None of these answers.
3. The Declining Balance (DB) depreciation method is always preferred to the
Straight Line (SL) depreciation method because the DB method completely and
more rapidly depreciates a fixed asset than the SL method.
a) True
b) False
4. Which of the following statements is true?
a) Smaller depreciation charges lead to more taxable income, smaller tax
liabilities and smaller after-tax cash flows.
b) Smaller depreciation charges lead to less taxable income, smaller tax
liabilities and smaller after-tax cash flows.
c) Higher depreciation charges lead to less taxable income, larger tax
liabilities and larger after-tax cash flows.
d) Higher depreciation charges lead to less taxable income, smaller tax
liabilities and larger after-tax cash flows.
e) None of the above answers.
5. A major difference between the analysis of private sector projects and the
analysis of public sector projects is that the analysis of
a) private sector projects includes all tangible and intangible impacts while
the analysis of public sector projects is limited to tangible impacts.
b) private sector projects includes only tangible impacts as does the analysis
of public sector projects.
c) private sector projects include only tangible impacts while the analysis of
public sector projects includes both tangible and intangible impacts.
d) None of these answers.
6. The net income (i.e., income after tax from the “Income and Expense Statement”)
of a business is equal to its
a) before-tax cash flow + income taxes paid + annual depreciation.
b) after-tax cash flow + income taxes paid.
c) before-tax cash flow + income taxes paid + annual depreciation.
d) after-tax cash flow - annual depreciation.
e) None of these answers.
7. A company’s annual income taxes are considered explicit cash flows while its
annual depreciation charges are implicit cash flows.
a) True
b) False
8. At the end of a physical asset’s projected service life, its book and salvage
values will always be equal with the Straight Line (SL) depreciation method but
will most likely differ with the Declining Balance (DB) depreciation method.
a) True
b) False
9. When the service requirements for a capital asset extend beyond the defender’s
remaining service life, it is usually assumed that the defender will be replaced by
a) a lower-cost asset
b) the challenger
c) an asset with an identical cost.
d) None of these answers.
10. The half-year rule was introduced by the Government of Canada in 1981 to
a) provide incentives to businesses for the purchase of more physical assets.
b) alleviate the income tax burden of businesses with significant income from operations
c) minimise the income tax advantage arising from the purchase of physical assets.
d) increase business operating profits.
11. The dollar value of cell AA is
a) 30,000
b) 54,000
c) 60,000
d) 48,000
e) None of the above answers
12. The dollar value of cell BB is
a) 30,000
b) 54,000
c) 60,000
d) 48,000
e) None of the above answers
13. The dollar value of cell CC is
a) 15,000
b) 11,250
c) 6,000
d) 5,000
e) None of the above answers
14. The dollar value of cell DD is
a) 37,500
b) 52,500
c) 43,200
d) 60,000
e) None of these answers
15. The dollar value of cell EE is
a) -300,000
b) -150,000
c) None of these answers
16. Ace Company’s current ratio (2 decimals, no rounding) on December 31, 2015
was
a) 0.57
b) 0.77
c) 1.12
d) 1.25
17. Ace Company’s quick-asset or acid-test ratio (2 decimals, no rounding) on
December 31, 2015 was
a) 0.77
b) 0.27
c) 1.30
d) 1.85
18. Ace Company’s “equity ratio” (2 decimals, no rounding) on December 31, 2015 was
a) 0.14
b) 0.57
c) 0.69
d) 0.86
e) None of these answers
19. Ace company’s “profitability ratio” (1 decimal, no rounding) on December 31, 2015 was
a) 4.8%
b) 5.4%
c) 8.7%
d) 12.1%
e) None of these answers
20. Ace company’s “long-term debt ratio” (2 decimals, no rounding) on December 31, 2015 was
a) 0.14
b) 0.67
c) 0.69
d) 0.86
e) None of these answers
21. Ace Company’s after-tax cash flow for 2015 was
a) $90,000
b) $45,500
c) $75,000
d) $135,000
e) None of these answers
22. The dollar amount of cell AA is
a) $300,000
b) $200,000
c) $270,000
d) None of these answers.
23. The dollar amount of cell BB is
a) $30,000
b) $74,000
c) $88,000
d) None of these answers
24. The dollar amount of cell CC is
a) $37,000
b) $74,000
c) $44,000
d) None of these answers
25. The dollar amount of cell DD is
a) 201,600
b) 236,800
b) 252,600
c) 296,800
26. The cash flow analysis of a private project can be performed from two
perspectives:
a) Efficiency and equity
b) Insider and outsider
c) Project and sponsors (owners)
d) Balance Sheet and Income/Expense financial statements
27. Economic life is defined as the
a) period of time after which an asset can no longer be repaired or refurbished so that it can perform a
useful function
b) period of time after which an asset cannot perform its intended function without a major overhaul
c) length of time an asset might reasonably be expected to be useful in the
production of income.
d) period of time over which a prudent owner will retain an existing facility to minimise costs.
28. Using the outsider approach, the defender’s annual equivalent cost (if it is not
beyond its economic life) is given by
a) -150,000(A/P,10%,5)-30,000
b) -150,000(A/P,10%,10)-30,000
c) -100,000(A/P,10%,5)-30,000
d) -100,000(A/P,10%,10)-30,000
e) None of these answers.
29. Using the outsider approach, the challenger’s annual equivalent cost is given by
a) -120,000(A/P,10%,20)-20,000
b) -120,000(A/P,10%,10)-20,000+40,000(A/F,10%,10)
c) -120,000(A/P,10%,10)-20,000-40,000(A/F,10%,10)
d) -(120,000-100,000)(A/P,10%,10)-40,000(A/F,10%,10)
e) None of these answers.
30. Using the insider approach, the defender’s annual equivalent cost (if it is not
beyond its economic life) is given by
a) -150,000(A/P,10%,5)-30,000
b) -150,000(A/P,10%,10)-30,000
c) -100,000(A/P,10%,5)-30,000
d) -30,000
e) None of these answers.
31. Using the insider approach, the challenger’s annual equivalent cost is given by
a) -120,000(A/P,10%,20)-20,000
b) -(120,000-100,000)(A/P,10%,10)-20,000+40,000(A/F,10%,10)
c) -120,000(A/P,10%,10)-20,000-40,000(A/F,10%,10)
d) -(120,000-100,000)(A/P,10%,10)-40,000(A/F,10%,10)
e) None of these answers.
32. Using the outsider approach and assuming the defender is beyond its economic
life, the defender’s cost for the coming year would be
a) -150,000(A/P,10%,1)-30,000+80,000(A/F,10%,1)
b) -100,000(A/P,10%,1)-30,000+80,000(A/F,10%,1)
c) -150,000(A/P,10%,5)-30,000
d) -100,000(A/P,10%,5)-30,000
e) None of these answers.
33. The defender is beyond its economic life when its marginal cost (or its cost for
the coming year) is
a) less than the annual equivalent cost for its economic life.
b) equal to the annual equivalent cost for its economic life.
c) larger than the annual equivalent cost for its economic life.
d) independent of the annual equivalent cost for its economic life.
34. If A, B, C, D and E are independent, valid projects are
a) All projects.
b) A, B, C and E.
c) A, C, D and E.
d) B, C, D and E.
35. If A, B, C, D and E are mutually exclusive, which project (if any) is best?
a) A
b) B
c) C
d) D
e) E
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