ISE 2040 Practice Exam Questions SP16 H2:

1. To manufacture an item in-house, the company would need to buy equipment costing
$250,000. It will have a life of 4 years, an annual operating cost of $80,000, and each unit
will cost $40 in material manufacture. Buying the item externally will cost $100 per unit. At i
= 15% per year, what is the breakeven quantity to achieve the same annual equivalent cost.

A. 1,214
B. 2,793
C. 3,544
D. 3,611

2. A construction company is considering buying a heavy-duty street sweeper to reduce labor

costs on the construction jobs, which can be labor intensive when they are working near
shopping malls that want everything clean all the time. However, the company doesnt
exactly know how much business they will get in the coming years. What is the Expected
Present Worth of the project?

Purchase Street Sweepers

$210,0
Initial One Time Investment Cost 00
$15,00
Annual Operating/Maint Cost - Gas/Repairs 0
MARR 10%
Project Life - Years 7
Annual Labor Savings - Strong Sales Year - $85,00
30% 0
Annual Labor Savings - Expected Sales Year $45,00
- 50% 0
Annual Labor Savings - Poor Sales Year - $25,00
20% 0

3. Lighting replacement projects are very popular with all the new rebates being offered.
In your business, you currently have 50 fixtures that use 250 Watts of power each and are
considering replacing them with 50 new fixtures that use 75 Watts of power each. If the new
fixtures have a life of 8 years and there is a quote for $2,000 to replace them all, how many
hours per year do you need to operate the fixtures in order to cost justify this at a MARR of
15% and an electric rate of $0.00015/watt hour using annual equivalent worth as the basis.

1
4. Calculate the rate of return for an investment with the following characteristics:

Initial cost $60,000

Project Life 10 years
Salvage Value $5,000
Annual Revenue $14,000
Annual M & O Cost $3,000

A. [ <5%]
B. [5- 10%]
C. [10 15%]
D. [> 15%]

5. Which of the following is NOT a financial statement of a company?

A. Income Statement
B. Balance Sheet
C. Cash Flow Statement
D. Working Capital Transfers Statement

6. In planning for your retirement, you have decided you would like to be able to withdraw
$60,000 per year for a 10- year period. The first withdraw will occur 11 years from today.
What amount must you deposit today (lump sum) if your return is $10%?

A. $ 67,402
B. $ 98,615
C. $142,135
D. $155,665

7. Parker Schnabel, from the TV series Gold Rush, is trying to decide if he should buy a new
heavy-duty dozer for $350,000. He knows that he should incur the annual maintenance cost
for $25,000 and after 8 years, he can sell it back for $85,000. At what annual lease cost
would he be in different between purchase and lease at a 5% MARR?

A. 48,255
B. 70,250
C. 85,995
D. 98,206

2
8. You want to have $1,250,000 when you retire in 30 years and you have found a great
investment that will pay 15% guaranteed for the life of the investment. You plan to take
advantage of this putting in money right away (beginning of the year) and annually for 12
consecutive years, you plan to save the same amount. What Excel functions would you use?

A. X = NPV (0.15, 12,, 1250000), PMT (0.15, 12, X)

B. X = -PMT (0.15, 12,,1250000)
C. X = PV(0.15,30,1250000), -PMT(0.15,12,X,1)
D. X = PV(0.15, 30,,1250000), PMT(0.15,12,X,,1)

9. When you graduate, you should save 12% of your gross income for retirement including
your savings and your employers in your 401K. Your employer matches your annual income
of $60,000 with a 4% match. If you never get a raise in your pay, how much will you have in
30 years, if you start investing at the end of this year using EXCEL at a 10% Interest rate?
A. PMT(0.10,30,7200)
B. NPV(0.10, 30,7200)
C. FV(0.10,30,4800,1)
D. FV (0.10, 30,7200,0)

10. Your friend just had their first child and they asked you to help them determine how
much they have to save every year for college. They are going to assume that there will be
no inflation. Their child will go to college 18 years from now and it will cost $30,000 per year
for 4 years. How much do you tell them they need to save every year starting now (Year 0)
and the annual cost is taken out at the beginning of the year if they save until they graduate
in 22 years using Excel at a 5% interest rate?

A. X=-FV(5%,4,30000),-PMT(5%,21,,X,0)
B. X=-PMT(5%,4,30000,,1), FV(5%,22,X)
C. X =-FV(5%, 4, 30000,,1),-PMT(5%, 22,,X,1)
D. X=FV(5%, 4,30000), PMT(5%, 22,,X)

3
11. Your friend is deciding to buy a car. The Lease cost is $350 per month for 4 years. The
cost to buy the car is Z and he knows he could sell it at the end of 4 years for $6,000 if he
buys it. What is the most he should pay for the car today to be indifferent if he buys or
leases it if his interest rate is 0.25% monthly in Excel (Note: Lease payments are due at the
beginning of the month)?

A. X = -PV(.25%, 48, 350,,1), Y=-PV(.25%,48,,6000), Buy car Z = X-Y

B. X= -PV(.25%, 48,350,0), Y=-PV(.25%, 4,,6000), Buy Car Z = X+Y
C. X = -FV(.25%, 48,350,0), Y=6000, Buy Car Z = -PV(.25%, 4,X+Y,1)
D. X= -FV(.25%, 48,350,0), Y=-FV(.25%, 1,6000,,1), Buy Car Z= X+Y

12. After graduation, you are considering buying a puppy. You are a dog lover and because
of that, you cant stand the thought that the dog wouldnt live forever, so you budget for this.
The puppy will cost $150 to buy from the pound with her shots completed. You learn it will
cost about $160 per year in food, and $200 per year in Vet Bills, $100 for grooming and
other expenses. What is the NPV of owning your dog at 10% interest?

13. Determine the Discounted Payback period of a new manufacturing process that costs
$15,000,000 with an annual Savings of $3,800,000 going up by 3% per year at a MARR of
10%

14. A new case packer costs $1,400,000 installed, but reduced downtime will save $5,000
per day in manufacturing costs and $40,000 in maintenance savings annually, if they work
365 days per year. If the project has a 10-year life and they think they can sell the packer for
$105,000 at the end of the project, what is the Net present worth of this project MARR 15%?

15. A very successful heath and recreation club wants to construct a mock climbing wall for
exercise for its customers use. Because of its location, there is a 30% chance of a 120-day
season of good outdoor weather, a 50% change of a 150-day season, and a 20% change of a
165-day season. An estimated 350 persons will use the mountain each day of the 4-month
(120 day) season, but only 100 per day for each extra day the season lasts. The feature will
cost $375,000 to construct and require a $25,000 rework each 4 years and the annual
maintenance and insurance will be $56,000. The climbing fee is $5 per person. If a life of 10
years is anticipated and a 15% per year return is expected, determine if the addition is
economically justified based on NPV.