Engineering Economics exam 2

| August 14, 2017

1.0
Name the three broad categories
of manufacturing costs: (3 pts)
Cost 1:_____________________________________________
Cost 2:_____________________________________________
Cost 3:_____________________________________________

2.0
Which of the following is not a
non-manufacturing cost: (1 pt.)
a General and administrative costs
b. Advertising costs
c. Janitor wages (Manufacturing Overhead)
d. Human Resource administration
e. Depreciation

3.0
Classify the following costs – fixed (F) or variable (V): (10 pts.)
a. Wages paid to
temporary workers F or V
b. Property
taxes on factory building F or V
c. Property
taxes on the administration building F
or V
d. Sales
commission F
or V
e. Electricity
for machinery and equipment in the plant F
or V
f. Natural gas
and electricity for the administrative office F or V
g.
Salaries paid to design engineers F
or V
h.
Regular maintenance on machinery and equipment F
or V
i. Factory property and casualty insurance F or V
h.
Shipping attributable to delivery of product F
or V

4.0 The cost of producing a
unit appears on financial
statements as soon as the final product is
manufactured. (1 pt) T or F

5.0 A steel fabricator
constructing an addition to the

manufacturing plant is viewed as direct labor. (1pt) T or F

6.0 The break-even point is
where total sales equals the total costs.
T
or F

(1pt)
7.0 The cost-of-goods-sold
budget is equal to the production budget.
T or F
(1pt)
8.0 The following graphs
represent what types of cost behaviors: (2 pts.)

Cost

Quantity or Volume

Cost

a.____________

b.
____________

Quantity or Volume

9.0 Name the three types of Cash Flow element categories: (3 pts)
a. ___________________________________________
b. ___________________________________________
c. ___________________________________________

10.0
Complete the following formula:
(2 pts)

Cash Flow from Operations = ___________ + __________

11.0
Complete the simple Income and
Cash Flow Statements categories: (5 pts)

INCOME STATEMENT
Revenues
Expenses:
O&M
a._________________________

Taxable Income
Income Taxes

b.
________________________

CASH FLOW STATEMENT
Operating Activities:
Net Income

c.______________________

Investment Activities:
Investment

d.
_____________________

Gains Tax
Financing Activities:
Borrowed funds
Repayment of principle

e.__________________________________

12.0
(55 pts)
A Firm is considering purchasing a machine that costs $65,000. It
will be used for 6 years and the salvage value is expected to be zero at the
end of that time. The machine will save $35,000 per year in labor, but it will
cost $12,000 in operating and maintenance (O&M) costs each year. The
machine will depreciate according to the five year MACRS. The firm’s tax rate
is 40%. Complete the following financial statements for this project:

Income Statement

0

1

2

3

4

5

6

Revenues

Expenses:

O&M

Depreciation

Taxable Income

Income Taxes
(40%)

Net Income

Cash Flow Statement

Operating
Activities:

Net Income

Depreciation

Investment
Activities:

Investment

Salvage

Gains Tax

Net Cash Flow

Note: 5 Year MACRS is as follows:

Year

Depreciation Percentage
(per IRS)

1

2

3

4

5

6

7

13.0 (55 pts)

Jim owns a lawn
care service. He would like to obtain a new heavy duty trailer to haul his
equipment and materials from job to job. He’s found one that will suit his
needs. The purchase price is $8,500. Jim is in a 28% tax bracket and sales
taxes are 5%. The cost of capital for Jim to purchase the trailer is 8%. The
trailer qualifies for 5 year MACRS depreciation method. Jim intends on using
the equipment for 60 months. The salvage value of the trailer at the end of the
use period is $4500. Jim has also found a dealer that is willing to lease the
trailer to him for 60 months for $150 per month. The lease payments would be
due at the beginning of the month. Determine if Jim should lease or buy this
trailer.

Lease Option: (show work)
a)
Total lease payment =
_________________________

b)
Net after-tax monthly lease
expense = ____________

c)
PW ( 8%/12)lease
=

PWlease
=

Buy Option: (show work)

a)
Complete this chart: (round to
the nearest dollar)

End of Year

5 year MACRS

Depreciation

Tax Benefit

PW (8%)
(P/F,i,N)

1

20%

2

32%

3

19.2%

4

11.52%

5

5.76%

Total Sum

a)
Up-front cash payment =
__________________________

b)
Book Value at the end of year 5
=_____________________

c)
Taxable Gains = ____________________________

d)
Tax Depreciation Benefit = (from
table above)

e)
Net proceeds from sale = Net
salvage = ______________ ;

f)
PW(8%) =
g)
Decision: lease or buy
(circle one)_____.

14.0 What three
conditions must exist in order for an item to be depreciated? (3 pts)
1.

2.

3.

15.0 Explain the difference between book depreciation and tax
depreciation. (3 pts)

16.0 Name the four
components of information needed to calculate depreciation: (4pts)

1.
___________________________________________

2.
___________________________________________

3.
___________________________________________

4.
___________________________________________

17.0
For the project described below, find the net income for the first year
of operation.
(10 pts)

Project description:
·
Purchased equipment costing
$56,000
·
Gross income: $100,000/yr
·
Cost of goods sold: $40,000/yr
·
Operating expenses: $12,000/yr
·
Depreciation method – 7-year
MACRS (see table in Ch9)
·
Income tax rate: 40%
·
Determine the net income
during the first year of operation

(see next page for table)

17.0 (cont’d)

Item

Amount

Gross Income (revenue)

Expenses:

Cost-of-goods-sold

Depreciation

Operating Expenses

Taxable Income

Taxes

Net Income

18.0 Define inflation: (5pts)

19.0 Define Producer Price Index: (5(pts)

20.0 Define Consumer Price Index: (5pts)

21.0 List 5 major groups that would be considered
in the “market basket” used to determine the Consumer Price Index: (5pts)

1.

2.

3.

4.

5.
22.0 What two periods were the CPI indices
re-baselined (base years)? (5pts)

1.__________ 2. __________

23.0 Given the costs over the years shown in the
following table, determine the yearly and the average inflation rate: (5pts)

Year

Cost

0

$604,000

1

$638,000

2

$677,000

3

$729,500

Year 1

Year 2:

Year 3

f =

24.0 The base price of a commodity is $100. The
inflation rate for this item in year one is 8% and the inflation rate in year
two is 12%. Calculate the actual inflated price at the end of year two and the
average inflation rate by solving the equivalence equation: (10 pts)

$100 (1+f)2
= Price at end of year 2

25.0 Name the six phases of the Cone of
Uncertainty: (10pts)

1.

2.

3.

4.

5.

6.

26.0 Which phase analyzes whether or not the
project realized the projected benefits? (1pt)

27.0 Define Break-Even Analysis (5 pt):

28.0 Reference problem 13.0. Jim
determined to purchase the trailer that he would like to finance the entire
purchase. Use the following information to fill in the Loan Repayment Schedule
(20pts).

Amount financed:
$8500 (do not include taxes)
Finance Rate: 8%
per year
Annual
Installment: A=

Round to the
nearest $xxxx.xx

End of Year

Beginning Balance

Interest Payment

Principle Payment

Ending Balance

1

2

3

4

5

Note: Rounding
issues may vary within $2.00 for the final Principle Payment entry.

Order your essay today and save 20% with the discount code: ESSAYHELP
Order your essay today and save 20% with the discount code: ESSAYHELPOrder Now