Multiple Choice Questions
1. Of the following three relations, the correct one or ones to calculate the annual worth of vendor 1 cash flow estimates is ( note : all dollar values are in thousands):
Relation 1: AW1 = – 200(A/P, 6%, 10) + 70 + 25(A/F, 6%, 10)
Relation 2: AW1 = [–200 – 50(P/A,6%,10) + 120(P/A,6%,10) + 25(P/F,6%,10)](A/P, 6%, 10)
Relation 3: AW1 = – 200(F/P, 6%, 10) + 25 + (–50 + 120) (A/P, 6%, 10)
(a) 1 and 3
(b) Only 1
(c) 1 and 2
(d) Only 3
2. The AW values for the alternatives are listed below. The vendor or vendors that should be recommended is:
AW1 = $44,723
AW2 = $43,370
AW3 = $40,000
(a) 1 and 2
(b) 3
(c) 2
(d) 1
3. The capital recovery amount for vendor 3 is:
(a) $40,000 per year
(b) $60,000 per year
(c) $43,370 per year
(d) $100,000 per year
4. If a revenue alternative has a negative AW value and it was correctly calculated, it means the following:
(a) The equivalent annual worth of revenues does not exceed that of the costs.
(b) The estimates are wrong somewhere.
(c) A minus or plus sign of a cash flow was entered incorrectly into the PMT spreadsheet function.
(d) The alternative should have a longer life so revenues will exceed costs.
5. All the following statements about the capital recovery amount for an alternative are false except:
(a) Annual revenue can be no more than this amount, if the alternative is selected.
(b) A monetary estimate of new capital funds required each year for the life of the alternative.
(c) An amount of revenue required to recover the first cost plus a stated return over the life of the alternative.
(d) Does not consider the salvage value, since it is returned at the end of the alternative’s life.