Q: A pipe installation has the following costs: $$22,000$$ initial, $$1.20$$ per hour pumping cost, $$2,000$$ hours per year, for $$5$$ years at $$7 ext{%}$$ interest. What is the Present Worth of total cost?

$$PW = 22,000 + 1.20 \times 2000(P/A, 7\%, 5)$$

Question 1

Which of the following is NOT an assumption made when solving economic analysis problems in Present Worth Analysis?

Accepted Answer

Sunk costs are considered in decision making.

Question 2

A company is evaluating two project alternatives with different useful lives: Project A (3 years) and Project B (6 years). What is the appropriate comparison period for Present Worth Analysis?

Accepted Answer

6 years

Question 3

Which economic criterion should be used when neither input nor output is fixed in an engineering economic analysis?

Accepted Answer

Maximize Net Present Worth

Question 4

A city wants to set aside enough money now to pay for $5,000 annual maintenance of a park forever, with an interest rate of 4%. What is the capitalized cost required?

Accepted Answer

$125,000

Question 5

Given the formula for Present Worth of a uniform series: $$PW = A(P/A, i, n)$$, what does the term $$(P/A, i, n)$$ represent?

Accepted Answer

The present worth factor for a uniform series

Question 6

A bond with a face value of $$1,000$$ pays $$4	ext{%}$$ interest semi-annually and matures in $$10$$ years. If the market rate is $$6.09	ext{%}$$ compounded semi-annually, what is the correct formula to calculate its price?

Accepted Answer

$$PW = 20(P/A, 3	ext{%}, 20) + 1000(P/F, 3	ext{%}, 20)$$

Question 7

If a project alternative has a useful life shorter than the study period, how should its Present Worth be calculated?

Accepted Answer

Repeat the alternative as many times as needed to cover the study period.

Question 8

A company is considering two construction options: build a full-sized facility now for $$400$$ million, or build a reduced-size facility now for $$300$$ million and expand it in $$25$$ years for $$350$$ million. At $$6	ext{%}$$ interest, what is the Present Worth of the two-stage construction?

Accepted Answer

$$381.6$$ million

Question 9

Which of the following best describes the treatment of sunk costs in Present Worth Analysis?

Accepted Answer

Sunk costs are ignored because they do not affect future decisions.

Question 10

A pump costs $$7,000$$ and has a salvage value of $$1,200$$ after $$12$$ years. If the interest rate is $$7	ext{%}$$, what is the Present Worth of the pump?

Accepted Answer

$$PW = -7000 + 1200(P/F, 7	ext{%}, 12)$$

Question 11

When comparing alternatives with different useful lives, what must be done to ensure a fair Present Worth comparison?

Accepted Answer

Extend both alternatives to a common study period using the least common multiple of their lives.

Question 12

If a project has a uniform annual benefit of $$A$$, an end-of-useful-life salvage value of $$S$$, and an initial cost of $$C$$, what is the general Present Worth formula?

Accepted Answer

$$PW = A(P/A, i, n) + S(P/F, i, n) - C$$

Question 13

A pipe installation has the following costs: $$22,000$$ initial, $$1.20$$ per hour pumping cost, $$2,000$$ hours per year, for $$5$$ years at $$7	ext{%}$$ interest. What is the Present Worth of total cost?

Accepted Answer

$$PW = 22,000 + 1.20 	imes 2000(P/A, 7\%, 5)$$

Question 14

Which spreadsheet function is used to find the Present Worth of cash flows occurring on specific dates, where time spans are not uniform?

Accepted Answer

XNPV

Question 15

In Present Worth Analysis, what is the effect of increasing the interest rate on the Present Worth of future cash flows?

Accepted Answer

Present Worth decreases as interest rate increases.

Question 16

A project alternative has a cost of $$13,500$$, annual benefits of $$3,000$$ for $$5$$ years, and a gradient benefit of $$500$$ per year. At $$7	ext{%}$$ interest, what is the Present Worth formula?

Accepted Answer

$$PW = -13,500 + 3,000(P/A, 7\%, 5) + 500(P/G, 7\%, 5)$$

Question 17

Which of the following is TRUE regarding the viewpoint adopted in Present Worth Analysis?

Accepted Answer

The analysis is performed from the viewpoint of the firm.

Question 18

If a project's Present Worth is negative, what does this indicate about the project's financial viability?

Accepted Answer

The project is not financially viable and should be rejected.

Present Worth Analysis: Principles and Applications

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