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Year 1 Year 2 Year 3 Initial outlay Cash net flow P80,000 P120,000 P80,000 P220,000 (i) Certainty coefficients 1 0.9 0.8 Calculate and evaluate the unadjusted profitability index of the project using a free-discount rate of 8 per cent. (10 marks) (ii) Redo question 3b (i) using adjusted profitability index by the given certainty equivalent coefficients. (14 marks) QUESTION 3 (a) Why is a discounted payback method superior to undiscounted payback period method? Provide an example to strengthen your argument. (12 marks) (b) Define and give examples (i) adjusted discount rate (ii) adjusted net (NPV), and explain the arguments for the adjustments. (9 marks) (c) Explain briefly why: (i) Profitability index should be greater than 1 for a project to be accepted. (ii) Net present value should be positive for a project to be accepted. (iii) Certainty coefficient decreases over time. (3 marks each) -END- ECO 313 ENGINEERING ECONOMICS QUESTION 1: (a) Mention and explain any two factors which influence changes of value of money over time. (b) Explain how time value of money influences engineering programmes/projects. [4 MARKS] [5 MARKS] (c) Differentiate, by giving examples, between present value and future value [4 MARKS] (d) Derive a general equation expressing the future value (F) in terms of present value P, interest rate (i) and time (t) in the case of (i) Simple interest (ii) Compound interest [2 MARKS] [4 MARKS] (e)(i) The terms of a short term loan requires an engineering company pay a lump sum of P50 million at the end of year 2. If interest is 12% compounded quarterly, what is the present value? [5 MARKS] (ii) Redo question e) (i) above if compounding was done continuously. [6 MARKS] QUESTION 2 (a) Define and explain briefly the following concepts in engineering project evaluation. (i) Risk premium (ii) Certainty equivalent coefficients (iii) External Rate of Return (ERR) [2 MARKS EACH] (b) An engineering company's net cash flow (in Pula millions) and certainty coefficients for a project are estimated as follows: 2

Year 1 Year 2 Year 3 Initial outlay Cash net flow P80,000 P120,000 P80,000 P220,000 (i) Certainty coefficients 1 0.9 0.8 Calculate and evaluate the unadjusted profitability index of the project using a free-discount rate of 8 per cent. (10 marks) (ii) Redo question 3b (i) using adjusted profitability index by the given certainty equivalent coefficients. (14 marks) QUESTION 3 (a) Why is a discounted payback method superior to undiscounted payback period method? Provide an example to strengthen your argument. (12 marks) (b) Define and give examples (i) adjusted discount rate (ii) adjusted net (NPV), and explain the arguments for the adjustments. (9 marks) (c) Explain briefly why: (i) Profitability index should be greater than 1 for a project to be accepted. (ii) Net present value should be positive for a project to be accepted. (iii) Certainty coefficient decreases over time. (3 marks each) -END- ECO 313 ENGINEERING ECONOMICS QUESTION 1: (a) Mention and explain any two factors which influence changes of value of money over time. (b) Explain how time value of money influences engineering programmes/projects. [4 MARKS] [5 MARKS] (c) Differentiate, by giving examples, between present value and future value [4 MARKS] (d) Derive a general equation expressing the future value (F) in terms of present value P, interest rate (i) and time (t) in the case of (i) Simple interest (ii) Compound interest [2 MARKS] [4 MARKS] (e)(i) The terms of a short term loan requires an engineering company pay a lump sum of P50 million at the end of year 2. If interest is 12% compounded quarterly, what is the present value? [5 MARKS] (ii) Redo question e) (i) above if compounding was done continuously. [6 MARKS] QUESTION 2 (a) Define and explain briefly the following concepts in engineering project evaluation. (i) Risk premium (ii) Certainty equivalent coefficients (iii) External Rate of Return (ERR) [2 MARKS EACH] (b) An engineering company's net cash flow (in Pula millions) and certainty coefficients for a project are estimated as follows: 2

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter17: Long-term Investment Analysis
Section: Chapter Questions
Problem 10E
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Year 1 Year 2 Year 3 Initial outlay Cash net flow P80,000 P120,000 P80,000 P220,000 (i) Certainty coefficients 1 0.9 0.8 Calculate and evaluate the unadjusted profitability index of the project using a free-discount rate of 8 per cent. (10 marks) (ii) Redo question 3b (i) using adjusted profitability index by the given certainty equivalent coefficients. (14 marks) QUESTION 3 (a) Why is a discounted payback method superior to undiscounted payback period method? Provide an example to strengthen your argument. (12 marks) (b) Define and give examples (i) adjusted discount rate (ii) adjusted net (NPV), and explain the arguments for the adjustments. (9 marks) (c) Explain briefly why: (i) Profitability index should be greater than 1 for a project to be accepted. (ii) Net present value should be positive for a project to be accepted. (iii) Certainty coefficient decreases over time. (3 marks each) -END-
Transcribed Image Text:Year 1 Year 2 Year 3 Initial outlay Cash net flow P80,000 P120,000 P80,000 P220,000 (i) Certainty coefficients 1 0.9 0.8 Calculate and evaluate the unadjusted profitability index of the project using a free-discount rate of 8 per cent. (10 marks) (ii) Redo question 3b (i) using adjusted profitability index by the given certainty equivalent coefficients. (14 marks) QUESTION 3 (a) Why is a discounted payback method superior to undiscounted payback period method? Provide an example to strengthen your argument. (12 marks) (b) Define and give examples (i) adjusted discount rate (ii) adjusted net (NPV), and explain the arguments for the adjustments. (9 marks) (c) Explain briefly why: (i) Profitability index should be greater than 1 for a project to be accepted. (ii) Net present value should be positive for a project to be accepted. (iii) Certainty coefficient decreases over time. (3 marks each) -END-
ECO 313 ENGINEERING ECONOMICS QUESTION 1: (a) Mention and explain any two factors which influence changes of value of money over time. (b) Explain how time value of money influences engineering programmes/projects. [4 MARKS] [5 MARKS] (c) Differentiate, by giving examples, between present value and future value [4 MARKS] (d) Derive a general equation expressing the future value (F) in terms of present value P, interest rate (i) and time (t) in the case of (i) Simple interest (ii) Compound interest [2 MARKS] [4 MARKS] (e)(i) The terms of a short term loan requires an engineering company pay a lump sum of P50 million at the end of year 2. If interest is 12% compounded quarterly, what is the present value? [5 MARKS] (ii) Redo question e) (i) above if compounding was done continuously. [6 MARKS] QUESTION 2 (a) Define and explain briefly the following concepts in engineering project evaluation. (i) Risk premium (ii) Certainty equivalent coefficients (iii) External Rate of Return (ERR) [2 MARKS EACH] (b) An engineering company's net cash flow (in Pula millions) and certainty coefficients for a project are estimated as follows: 2
Transcribed Image Text:ECO 313 ENGINEERING ECONOMICS QUESTION 1: (a) Mention and explain any two factors which influence changes of value of money over time. (b) Explain how time value of money influences engineering programmes/projects. [4 MARKS] [5 MARKS] (c) Differentiate, by giving examples, between present value and future value [4 MARKS] (d) Derive a general equation expressing the future value (F) in terms of present value P, interest rate (i) and time (t) in the case of (i) Simple interest (ii) Compound interest [2 MARKS] [4 MARKS] (e)(i) The terms of a short term loan requires an engineering company pay a lump sum of P50 million at the end of year 2. If interest is 12% compounded quarterly, what is the present value? [5 MARKS] (ii) Redo question e) (i) above if compounding was done continuously. [6 MARKS] QUESTION 2 (a) Define and explain briefly the following concepts in engineering project evaluation. (i) Risk premium (ii) Certainty equivalent coefficients (iii) External Rate of Return (ERR) [2 MARKS EACH] (b) An engineering company's net cash flow (in Pula millions) and certainty coefficients for a project are estimated as follows: 2
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