EEcon_Economic Analysis of Alternatives

Question 1

It is the rate of return chosen top management of
an organization to maximize its economic wellbeing

Answer 1

Minimum Attractive Rate of Return (MARR)

Question 2

Interest rate that the firm wishes to earn on its
investment

Answer 2

Minimum Attractive Rate of Return (MARR)

Question 3

It is also known as hurdle rate, target rate, cut-off rate, discount rate or valuation rate

Answer 3

Minimum Attractive Rate of Return (MARR)

Question 4

It is based on the concept of equivalent worth of
all cash flows relative to some base or beginning
point in time called the present

Answer 4

Present Worth (PW) Method

Question 5

What is the criterion for accepting a project based on the Present Worth (PW) method?

Answer 5

Accept the project if PW ≥ 0

Question 6

If the project has a FW that is greater than 0, is the project acceptable?

Answer 6

Yes. A project is acceptable if FW ≥ 0

Question 7

What is the criterion for accepting a project based on the Annual Worth (AW) method?

Answer 7

Accept the project if AW ≥ 0

Question 8

It involves solving for the interest rate that equates the equivalent worth of cash inflows (receipts
or savings) to the equivalent worth of cash outflows
(expenditures, including investments)

Answer 8

Internal Rate of Return (IRR) Method

Question 9

This makes PW = 0 true.

Answer 9

Internal Rate of Return (IRR)

Question 10

True or false.

A project is acceptable if IRR (i’*) ≥ MARR

Answer 10

True

Question 11

True or false.

The IRR method may be used only if the following
conditions are satisfied:

1. The first non-zero cash flow is a disbursement.
2. There is only one change in sign in the sequence,
   i.e. an initial disbursement or a series of
   disbursements followed by a series of receipts.
3. The sum of all the receipts exceeds the sum of all
   cash outflows.

Answer 11

True

Question 12

B/C is equal to

Answer 12

B/C = Benefits of the proposed project / Total cost o the proposed project

Question 13

True or false

A project is acceptable if the B/C ratio less than or equal to 1.0

Answer 13

False, a project is acceptable if the B/C ratio greater than or equal to 1.0

Question 14

True or false

The alternative that requires the minimum investment of capital and produces satisfactory functional results will be chosen among mutually exclusive alternatives unless the incremental capital associated with an alternative having a larger investment can be justified with respect to its incremental savings (or benefits).

Answer 14

True

Question 15

It is the alternative that requires the least investment of capital and that has a return equal to or greater than the MARR.

Answer 15

Base alternative

Question 16

Investments are called ____ when the selection of
one feasible method or alternative excludes the consideration of any other alternative.

Answer 16

Mutually exclusive

Question 17

Alternatives with initial or capital investment(s) expected to produce positive cash flows from increased revenue, savings through reduced costs, or both.

Answer 17

Investment alternatives

Question 18

Alternatives with all negative cash flow elements
except for a possible positive cash flow element from disposal of assets (salvage value) at the end of the project’s life

Answer 18

Cost alternatives

Question 19

When comparing mutually exclusive alternatives with EQUAL lives, what methods can be used?

Answer 19

PW, FW, AW, IRR, B/C

Question 20

Which method is best to use when comparing mutually exclusive alternatives with UNEQUAL lives?

Answer 20

AW method

Question 21

True or false

Assuming repeatability means assuming that the
economic consequences during the alternative’s
initial life span will be the same in all succeeding life
spans.

Answer 21

True

Question 22

In this method of comparison, the cash flow of each alternative will be reduced to time zero by assuming an interest rate i

Answer 22

Present Worth (PW) method

Question 23

Under this method of comparing alternatives, the future worth of various alternatives will be computed. Then, the alternative with maximum future worth of net revenue or minimum future worth of net cost will be selected.

Answer 23

Future Worth (FW) method

Question 24

Under this method, the annual equivalent cost or the revenue of each alternative will be calculated. Then the alternative with maximum annual equivalent revenue in the case of revenue based comparison or with the minimum annual equivalent cost in the case of cost based comparison will be selected

Answer 24

Annual Worth (AW) method