KATHMANDU UNIVERSITY Marks Scored:

End Semester Examination[C]

2014
Level : B.E. /B. Pharm. / B. Tech Course : MGTS 301
Year : III Semester: I
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Exam Roll No.: Time : 30 min F. M. : 20

Registration No.: Date :

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SECTION “A”
[20Q  1 = 20 marks]
1. All of the following are examples of cash inflows except:
a. Asset salvage value b. Income taxes
c. Operating cost reduction d. Construction cost savings

2. If you deposit $1,000 over three years at 9% annual interest (meaning that you will make
one lump sum withdrawal at the end of three years), what is the interest earned in the 2nd
year?
a. $90.00 b. $98.34 c. $98.10 d. $106.93

3. We have the following demand and supply functions,

Demand: Qd = 600 - 30P, Supply: Qs = -300 + 120P. Equilibrium price and output are
a. P = $2 and Q = 540 b. P = $10 and Q = 300
c. P = $3.33 and Q = 500 d. P = $6 and Q = 420

4. Which one of the following statements is false?

a. Average total cost is total cost per unit of output.
b. Total cost equals total fixed cost plus total average cost.
c. Average fixed cost plus average variable cost equals average total cost.
d. Marginal cost depends on the amount of labor hired.

5. An investment project costs P. It is expected to have an annual net cash flow of 0.125P for
20 years. What is the project’s payback period?
a. 0 year b. 6 years c. 8 years d. 11 years

6. The price of burgers increases by 22% and the quantity of burgers demanded falls by 25%.
This indicates that demand for burgers is:
a. elastic b. inelastic c. unitarily elastic d. perfectly elastic

7. What effect would have on the break-even point and expected profit if there is an increase
in fixed cost?
a. (decrease, decrease) b. (decrease, increase)
c. (increase, increase) d. (increase, decrease)

8. Vi Wilson is interested in buying an automobile priced at $18,000. From her personal

savings, she can come up with a down payment in the amount of $3,000. The remaining
balance will be financed by the dealer over a period of 36 months at an interest rate of
6.25%, compounded monthly. Which of the following statements is correct?
a. The monthly payment can be calculated by using A = $15,000(A/P, 6.432%/12, 3)
b. The monthly payment can be calculated by using A = $15,000(A/P, 0.5208%, 36)
c. The monthly payment can be calculated by using A = $15,000(A/P, 6.25%, 3)/12
d. The dealer’s annual percentage rate (APR) is 6.432%
9. Alternative A has a first cost of $10,000, an annual operating cost of $5,000 and a salvage
value of $2,000. Alternative B has an initial cost of $25,000, an annual operating cost of
$1,000 and a salvage value of $12,000. If both alternatives have a five-year life, the
equation that will yield the rate of return on the incremental investment is:
a. 0 = -$15,000 + 4,000(P/A,i,5) + 10,000(P/F,i,5)
b. 0 = -$15,000 + 4,000(P/A,i,5) - 10,000(P/F,i,5)
c. 0 = -$15,000 + 4,000(P/A,i,5) + 12,000(P/F i,5)
d. 0 = -$15,000 - 4,000(P/A,i,5) + 10,000(P/F,i,5)

10. A manufacturing process has fixed costs of $20,000 per year with variable costs of $15
per unit. If the company sells each unit for $20, the number of units that must be sold
each year in order to reach breakdown is nearest to:
a. 1,000 units b. 2,000 units c. 3,000 units d. 4,000 units

11. In an economic service life (ESL) analysis, the capital recovery term _______ with each
year of ownership.
a. Decreases b. Increases c. Remains same d. Cannot say

12. The LCM of lives is required to perform an analysis for different life assets for the
following methods: __________________
a. AW and B/C b. PW, AW, and IRR
c. Life cycle costs d. Payback period

13. In top down costing and design approach which of the following holds true
a. Target cost = competitor’s price - desired profit
b. Target cost = ( 1+ profit margin) /competitor’s price
c. Target cost = competitor’s price+ desired profit
d. None of the above

14. The annual equivalent costs of retaining a defender over its 3 year remaining life and the
annual equivalent operating costs for its challenger over its 4 year physical life are given
below. Use MARR of 12% and determine the optimal replacement time. Assume an
infinite planning horizon and no technological change (cost) in the challenger. What
would be your decision?

Holding Annual equivalent cost

Period
Defender Challenger
1 $3000 $5000
2 2500 4000
3 3200 3100
4 4500
a. Replace now b. Replace 1 year later
c. Replace 2 years later d. Replace 3 years later

15. Which of the following is the method of calculating depreciation

a. Delphi method b. Unit of production method
c. Moving average method d. Exponential smoothing

16. Chose the option which does not support definition of depreciation
a. Be inventory or investment property b. Be used in business
c. Have a determinable useful life d. Wear out, decay, get used up
17. A dimensionless number that expresses the ratio of cost estimates at two different times
is a
a. Power law model b. Throughput rate
c. Cost index d. Cost capacity factor

18. A used machine, which had a initial cost of $70,000, was purchased by Company A for
$50,000. The company expects to depreciate the machine over a five-year period and
then sell it for $10,000. According to the straight line method, the depreciation charge in
year two is nearest:
a. $8000 b. $10,000 c. $12,000 d. $14,000

19. If the sensitivity of several parameters is shown on one graph, the scale of the x-axis
should be ________________ from the most likely estimated value.
a. Decision node b. Probability node
c. Percentage deviation d. Measure of worth

20. Which of the following is not a component of integrated approach for developing cash
flows
a. Work breakdown structure b. Saving investment structure
c. Cost and Revenue structure d. Estimating technique
 KATHMANDU UNIVERSITY
End- Semester Examination[C]
2014
Level : B.E. /B. Pharm. / B. Tech Course : MGTS 301
Year : III Semester : I
Time : 2 hrs. 30 min F.M : 55
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SECTION "B"

Attempt ALL the questions. Missing parameters can be assumed suitably.

1 a. Suppose you work in an account/ finance department of a company which produces [4]
biscuits. Explain various types of cost you encounter during your job. Use of proper
terminologies is expected in the answer.

b. A firm is planning to manufacture a new product. The sales department estimates that [2]
the quantity that can be sold depends on the selling price. As the selling price is
increased, the quantity that can be sold decreases.
Numerically they estimate: P = $35.00 - 0.02Q, where P =selling price per unit, Q =
quantity sold per year. On the other hand, the management estimates that the average
cost of manufacturing and selling the product will decrease as the quantity sold
increases.
They estimate C = $4.00Q + $8000, where C = cost to produce and sell Q per year. The
firm's management wishes to produce and sell the product at the rate that will maximize
profit, that is, where income minus cost will be a maximum. What quantity should the
decision makers plan to produce and sell each year?

c. What is the major disadvantage of payback period method of project selection? Given [3]
below are the two projects, Project A and Project B. Based on the payback period
method, which project should be selected.
Project A Project B
-1000 -1000
500 100
400 300
300 400
100 600

2 a. Morris Glass Company has decided to invest funds for the next 5 years so that [4]
development of “smart” glass is well funded in the future. This type of new-technology
glass uses electrochrome coating to allow rapid adjustment to sun and dark in building
glass, as well as assisting with internal heating and cooling cost reduction. The financial
plan is to invest first, allow appreciation to occur, and then use the available funds in the
future. All cash flow estimates are in $1000 units, and the interest rate expectation is 8%
per year.
Years 1 through 5 (investment): Invest $7000 in year 1, decreasing by $1000 per
year through year 5.
Years 6 through 10: No new investment and no withdrawals.
Years 11 through 15(withdrawal): Withdraw $20,000 in year 11, decreasing
20% per year through year 15.
Determine if the anticipated withdrawals will be covered by the investment and
appreciation plans. Use Present worth method.
 b. Bajhang Energy Company is considering two mutually exclusive projects, X and Y. [6]
Both projects have a life of 3 years. The expected cash flows are as follows. Use
MARR= 10% per year.
Year X Y
0 -10000 -8500
1 5125 4450
2 5125 4450
3 5125 4450

a) Check the feasibility of both the projects based on NPV and IRR measures.
b) Which project would you select and why?

OR

a. The cost of tuition at public universities has been steadily increasing for many years. [4]
One Midwestern university pledged to keep the tuition constant for 4 years for all
students who finished in the top 3% of their class. One such student who liked research
planned to enroll at the university and continue there until earning a PhD degree (a total
time of 9 years). If the tuition for the first 4 years will be $7200 per year and it increases
by 5% per year for the next 5 years, what is the present worth of the tuition cost at an
interest rate of 8% per year?

b. A special-purpose machine is to be purchased at a cost of $15,000. The following table [6]

shows the expected annual operating and maintenance cost and the salvage values for
each year of the machine’s service:

Year of O&M costs Market value

service
1 $2,500 $12,800
2 3,200 8,100
3 5,300 5,200
4 6,500 3,500
5 7,800 0

If the interest rate is 10%, what is the economic service life for this machine, and the
annual equivalent cost at 5th year.

3 a. Explain cost and revenue estimates based on detail, accuracy, cost and their intended [3]
use.
b. Miriam has been asked to estimate the cost today of a 2500ft2 heat exchange system for [2]
the new plant being-analyzed. She has the following data.
Her company paid $50,000 for a 1000ft2 heat exchanger 5 years ago.
Heat exchangers within this range of capacity have a power sizing exponent (x) of 0.55.
Five years ago the Heat Exchanger Cost Index (HECI) was 1306; it is 1487 today.
 c. A company is planning to introduce a new product in the market. The best competitor
sells a similar product in the market. The best competitor sells a similar product at $420/
unit. Other pertinent data are as follows:
Direct labor cost: $15.00/hour
Factory overhead: 120% of direct labor
Production materials $ 300/unit
Packaging costs: 20% of direct labor
It has been found that an 85% learning curve applies to the labor required. The time to
complete the first unit has been estimated to be 5.26 hours. The company secedes to use
the time required to complete the 20th unit as a standard for cost estimation purposes.
The profit margin is based on the total manufacturing costs.
a. Using the information given, determine the maximum profit margin that the company [3]
can have so as to remain competitive.
[2]
b. If the company desires a profit margin of 15%, can the target cost be achieved? If not,
suggest two ways in which the target cost can be achieved.

4 a. Determine how sensitive the decision to invest in the system is to the estimates of The [6]
RX Drug Company has just purchased a capsulating machine for $76,000. The plant
engineer estimates the machine has a useful life of 5 years and little or no salvage value.
He will use zero salvage value in the computations. Compute the depreciation schedule
for the machine using:
(a) Straight-line depreciation.
(b) Sum-of-years'-digits depreciation.
(c) Double declining balance depreciation.

b. Acme Delivery is considering a proposal for new package tracking technology. The [5]
system has an estimated initial cost of $1.9 million and will require upgrades and
maintenance of $140,000 each year. Acme estimates that improved tracking will save
approximately $680,000 per year, after system operating expenses. Acme has a MARR
of 15% per year, and the study period for this technology is 6 years, after which time
Acme expects the entire system will need to be replaced.
Explain with the sensitivity diagram within the range of ± 20% PW changes in the
estimates for i) initial investment cost and ii) useful life, other parameters remain
constant.

5 The federal government is planning a hydroelectric project for a river basin. In addition
to producing electric power, this project will provide flood control, irrigation, and
recreation benefits. The estimated benefits and costs expected to be derived from the
three alternatives under consideration are listed in the following table:

Decision Alternatives
A B C
Initial const $8,000,000 $10,000,000 $15,000,000
Annual benefits or costs:
Power sales $1,000,000 $1,200,000 $1,800,000
Flood control savings 250,000 350,000 500,000
Irrigation benefits 350,000 450,000 600,000
Recreation benefits 100,000 200,000 350,000
O&M costs 200,000 250,000 350,000
 The interest rate is 10%, and the life of each of the projects is estimated to be 50 years.
(a) Find the benefit–cost ratio for each alternative. [6]
(b) Select the best alternative using incremental B/C method [3]
OR
The Idaho Department of Fish and Wildlife (IDFW) is considering two locations for a
new state park. Location E would require an investment of $3 million and $50,000 per
year to maintain. Location W would cost $7 million to construct, but the IDFW would
receive an additional $25,000 per year in park fees. The operating cost of location W
will be $65,000 per year. The revenue to park concessionaires will be $500,000 per year
at location E and $700,000 at location W. The disbenefits associated with each location
are $30,000 per year for location E and $40,000 per year for location W. Assume the
park will be maintained indefinitely. Use an interest rate of 12% per year to determine
which location, if either, should be selected on the basis of on the basis of [9]

(a) The conventional B/C method

(b) The modified B/C method

6 Write short notes on ( any THREE) [6]

a. Nominal and Effective interest rate
b. Elasticity of demand
c. Principles of engineering economy
d. Break even analysis

Use following formulas if needed:

Uniform series
(F/A, i, N) = {(1+i)N – 1)/ i
(P/A, i, N) = {(1+i)N – 1}/{i (1+i)N )
(A/F, i, N) = i/{(1+i)N – 1}
(A/P, i, N) = i(1+i)N /{(1+i)N -1}

Gradient series
(A/G, i, N) = [{(1+i)N – iN–1}/i{(1+i)N – 1}]
(P/G, i, N) = [{(1+i)N – iN–1}/i2 (1+i)N]

(P/A1, g, i, N) = [{1– (1+g)N ( 1+i) –N}/( i – g)]

Answer Key to objective questions
Question No. Correct option
1 b
2 c
3 d
4 b
5 c
6 a
7 d
8 b
9 a
10 d
11 a
12 b
13 a
14 c
15 b
16 a
17 c
18 a
19 c
20 b