MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) What is the economic life of an asset? 1) A) the service life that minimizes the average cost of an asset over time By the service life that minimizes the cost of replacing the asset () the service life that accounts for the costs of an asset replacement D) the service life that minimizes the marginal cost of an asset E) the service life that maximizes revenues generated by an asset 2) What is the equivalent annual cost (EAC)? 2) A) annual cost of the initial investment in an asset spread over its economic life B) average annual cost of owning and operating an asset over its economic life () the sum of the asset's depreciation and its operating costs in any given year D) the difference between the profits generated by an asset and the cost of operating it E) the market cost of replacing the service provided by an asset 3) TRINITY Led. produces different pieces of furniture. A set of electric drills used in the production 3) of furniture wears out rapidly, after which the firm scraps them. Calculate the equivalent annual cost (capital costs) of a set of electric drills if the firm buys the set for $4 500 and uses it for 5 years. Assume an annual interest rate of 8%. A) $1 127 B) $1 284 () $1 062 D) $1 206 E) $900 4) Why should businesses take into account tax impacts? 4) A) Taxes reduce the costs of a successful project. B) Taxes increase the gross profit of a business. () Taxes allow the government to pay for public goods and services. D) Taxes directly affect a business's cash flow. E) Taxes are savings for a Canadian business. 5) Which of the following can be called the challenger? 5) A) a piece of land that a company owns B) payments that a company receives from its clients () machinery that a company wants to acquire D) an assembly line that a company wants to replace E) a revenue generated by a company 6) A tax is progressive if 6) A) the rate of taxation increases by a constant amount with an increase in income. B) the rate of taxation increases proportionally with an increase in income. () the rate of taxation increases faster than the income. D) the rate of taxation increases by a constant pe entage with an increase in income. E) the rate of taxation increases slower than the income.7) A replacement study showed that the components of the total costs of an asset are as follows: 7) Total Costs Capital costs Cost per period Operating Costs 01 2 3 4 5 6 7 8 9 10 11 12 Years What is the economic life of an asset? A) 12 years B) 6 years () 9 years D) 7 years E) 7.5 years 6) When making a replacement decision B) A) capital costs of the defender are irrelevant. B) capital costs of the challenger are irrelevant () operating costs of the challenger are irrelevant. D) operating costs of the defender are irrelevant E) capital costs of the defender incurred in the past are irrelevant. 9) What asset will most likely contain sunk cost? 9) A) refrigerator B) rail tracks () administrative building D) airplane E) auto repair equipment 10) In the CCA system "the half-year rule" implies 10) A) that a firm cannot depreciate the capital cost of an asset for at least half a year after the asset is purchased. B) that a firm can depreciate the capital cost of an asset during the first half a year the asset is purchased. () that a firm can depreciate half the capital cost of a new asset in the year the asset is purchased. D) that a firm can depreciate half the remaining capital cost of an asset in any given year after the asset is purchased E) that a firm can depreciate half the capital cost of an asset during the first half a year the asset is purchased.11) What economic conditions underlie market failures? 11) A) Aggregate benefits to all persons are less than aggregate costs imposed. B) There is environmental damage which is addressed by environmental tax. () External costs are greater than private costs. D) There is a monopolist who sets the price equal to the marginal cost. E) All costs are born by market participants. 12) What are the two conditions behind the One Year Principle? 12) A) Capital costs for a defender are higher than the operating costs, and the annual operating costs are gradually increasing- B) Capital costs for a defender are small compared to the operating costs, and the annual operating costs are gradually increasing () Capital costs for a defender are less than the operating costs, and the increase in annual operating costs is not monotonic. D) Capital costs for a defender are higher than the operating costs, and the increase in annual operating costs is not monotonic. E) Capital costs for a defender are less than the operating costs, and the annual operating costs are monotonically declining 13) The hedonic price method is a way of setting a value on a social good based on 13 A) how much an ideally rational individual would pay for that good. B) how much people say they value that good when surveyed. () how much people are prepared to pay to acquire that good. D) how much it would cost the government to provide a substitute for that good. E) the popularity of a political party that advocates that good.14) How should market failures be addressed? 14) A) through the establishment of barriers to enter the market B) through free market interactions between consumers and producers () through the replacement of social equilibrium by market equilibrium D) through government intervention and the courts E) through market deregulations 15) What was the major reason for the government's introduction of the Half-Year Rule? 15) A) to address the problem of delivery of public goods and services B) to internalize externalities () to address the government's losses due to companies purchasing assets at the end of their fiscal year D) to follow international practice E) to reduce business activity 16) The undepreciated capital cost (UCC) is equal to 16) A) the salvage value of an asset. B) the market value of an asset () the scrap value of an asset. D) the book value of an asset for the purpose of taxation under the CCA system. E) the non- taxable value of an asset. 17) Why do businesses want to depreciate their assets as soon as possible? 17) A) to streamline their cash flows in the long- run B) to balance their assets and liabilities () to increase productivity of their operations D) to decrease the amount of taxes they must pay E) to release funds for further reinvestment18) The effect of taxation on annual savings is captured by 18) A) the capital salvage factor. B) multiplying savings by the corporate tax rate. () multiplying savings by one minus corporate tax rate. D) the depreciation rate. E) the capital tax factor. 19) The before- tax MARR is 19) A) lower than the after- tax MARR by a factor of (1 - 1), where f is the corporate tax rate. B) approximately equal to the after-tax MARR. ") higher than the after- tax MARR by a factor of (1 - 1), where f is the corporate tax rate. D) higher than the after- tax MARR by a factor , where f is the corporate tax rate. E) lower than the after- tax MARR by a factor , where f is the corporate tax rate. 20) If Trevor uses the real MARR and determines cash flows in actual dollars then he 20) A) estimates the profitability of investments incorrectly. B) overestimates the profitability of investments. () underestimates the profitability of investments. D) cannot estimate the profitability of investments. E) estimates the profitability of investments correctly. 21) In general, inflation is defined as 21) A) the increase in Gross Domestic Product over time. B) an increase in the purchasing power of money over time. () the difference between the real and nominal Gross Domestic Product (GDP). D) a measure of the average person's preference for a present good compared to a future good. E) an increase in prices of goods and services that are included in a consumption basket over time. 22) If Tonya as a municipal engineer evaluates a project which is subject to the effect of inflation, she 22) should A) work with nominal values for cash flows and real interest rates. B) work with real values for cash flows and nominal interest rates. () rely on forecast of future interest rates and cash flows in real or nominal terms. D) work with nominal values for cash flows and nominal interest rates. E) work with constant values for cash flows and current interest rates. 23) The cost of one of the following products has changed very differently from the others over time. 23) Which is the odd one out? Aj oil B) computers () dothing D) food E) housing24) The real MARR can be defined as 24) A) the actual MARR plus an adjustment that reflects the inflation effect. B) the real interest rate plus an adjustment that reflects the inflation effect. () the real interest rate minus an adjustment that reflects the inflation effect. D) the actual MARR minus an adjustment that reflects the inflation effect. E) the actual interest rate plus an adjustment that reflects the inflation effect. 25) The equation that converts actual dollars into real dollars can be written in terms of 25) A) the compound amount factor. B) the capitalized value. () the series present worth factor. D) the present worth compound interest factor. E) the capital recovery factor. 26) A valuable asset was priced at $1 million in 1995. What should be its nominal price in 2012 if the 26) CPI was 95 in 1995 and 145 in 2012? A) $1.53 million B) $1.25 million () $1.65 million D) $1.45 million E) $0.95 million27) What are the two reasons that a large portion of capacity cost is usually incurred early in the life of 27) the capacity? A) (i) There is a substantial cost associated with getting an asset ready for sale as salvage (ii) operating costs tend to fall as staff get more expert in using the asset. B) (i) Assets lose their value most quickly early in their lives and (ii) installation costs are often large, and are incurred up- front. () (i) Maintenance costs are usually higher in the early part of the capacity's life, and (ii) assets lose their value most quickly early in their lives. D) (i) Installation costs are often large, and are incurred up- front and (ii) there is a substantial cost associated with getting an asset ready for sale as salvage. E) (i) Installation costs are often large, and are incurred up- front, and (ii) maintenance costs are usually higher in the early part of the capacity's life. 28) Engineering decisions associated with public projects should be based on 28) A) social costs and benefits. B) marginal costs and benefits. () marginal willingness to pay. D) market costs and benefits. E) environmental costs and benefits. 29) In cost-benefit analysis associated with public projects, all costs and benefits should be evaluated in 29) terms of A) market supply and demand. B) profitability C) market values. D) marginal willingness to pay. E) social values. 30) Which of the following is an advantage of the modified benefit - cost ratio as compared with the 30) conventional benefit- cost ratio? A) It includes the effects of inflation. B) It includes social costs. () It provides a measure of the net gain per dollar invested by the project sponsor. D) It is easier to calculate. E) It includes the effects of taxation