IEECONO (Quiz 2)

Question 1

EOY

Answer 1

End of Year (Financial Year)

Question 2

P

Answer 2

Original Installed Cost of the depreciable property

Question 3

N (in depreciation)

Answer 3

Depreciable Life of the Asset

Question 4

F

Answer 4

Salvage Value of the asset after its useful life of N years

Question 5

dn

Answer 5

Depreciation charge for year n and is dependent on the method used

Question 6

Dn

Answer 6

Accumulated Depreciation charges from the acquisition time to the end of year n

Question 7

BV

Answer 7

Book Value of the asset at the end of year n

Question 8

When getting P, what should be included as part of the cost?

Answer 8

Costs of the assets (shipping, insurance, etc). Operating expenses are not part.

Question 9

Straight Line Method

Answer 9

dn = (P-F)/N
Dn = n(dn)
BVn = P-Dn

Question 10

Declining Balance Method (DB)

Answer 10

k = 1-sqrt(F/P) ; index = n
BVn = P(1-k)^n
dn = kBV(sub n-1) = kP(1-k)^n-1
Dn = P - BVn

Question 11

Sum of the Years Digit Method (SYD)

Answer 11

dn = (P-F)(2(N-n+1)/N(N+1))
Dn = (P-F) ((2N-n+1)n / N(N+1))
BVn = P - Dn

(Note: It is easier in excel)

Question 12

Sinking Fund Method

Answer 12

dn = (P-F)(i / (1+i)^N - 1)
Dn = dn ((1+i)^n - 1 / i)
BVn = I - Dn

Question 13

Service Output Method

Answer 13

d = (P-F) / N
BVn = I - Dn

Question 14

Double Declining Balance Method

Answer 14

Same formulas as Declining Balance

k = 2/N

Question 15

Investment Decision Criteria for Payback Method

Answer 15

Accept projects with a a payback period below the policy payback period

Question 16

Investment Decision Criteria for Discounted Payback Method

Answer 16

Accept projects with a a payback period below the policy payback period

Question 17

In Application of Money Time Relationships, outflows are _________ .

Answer 17

Negative

Question 18

In Application of Money Time Relationships, inflows are _________ .

Answer 18

Positive

Question 19

Investment Decision Criteria for NPV Method (PW, FW, AW)

Answer 19

Accept projects with an NPV >= 0

Question 20

Formula for NPV (Net Present Value)

Answer 20

Inflows vs Outflows
PV of Inflows+ PV of Salvage Value - Investment
(Same concept applies for NFV, NAV)

Question 21

If NPV = 0, the IRR is ________ to the MARR

Answer 21

Equal

Question 22

What is the downside when using the IRR method?

Answer 22

It favors smaller projects (Always chooses a higher rate of return despite the investment being smaller compared to the other)

Question 23

Formula for ERRR (Explicit Reinvestment Rate of Return)

Answer 23

ERRR = (R-D)-(I-S)(i/(1+i)^N - 1) / I

i = effective interest rate or MARR
R = Annual receipts
D = annual disbursements
I = Investment
S = Salvage Value

Question 24

Suppose that we conduct an incremental analysis of Alpha vs Beta, what is your basis for subtracting? (is it B-A or A-B)

Answer 24

It depends on which would result in the investment being negative

Question 25

What is the procedure for ERR

Answer 25

1. Get the PV of all net outflows (-)
2. Get the FV of all net inflows (+)
3. Apply formula 4 which is
   (FV/PV)^(1/N) - 1