MAKERERE UNIVERSITY DEPARTMENT OF CHEMISTRY BIC II TEST I

COURSE: ICH 2219 DATE: May, 2012 LECTURER: MR. M.MAWANGA/ MR. G.W. MUBIRU

TIME ALLOWED: 1 1 2 HOURS ATTEMPT ALL THE QUESTIONS 1. Explain, with relevant examples, the following economic terms a) Payback period b) Cash flow c) Sales income d) Internal Rate of Return e) Optimal replacement period. 2. a) Explain what you understand by the term Capitalized costs and derive the relevant equations. b) A new storage tank can be purchased and installed for $10,000. This tank would last for 10 years. A worn-out storage tank of capacity equivalent to the new tank is available and it has been proposed to repair the old tank instead of buying a new one. If the tank were repaired, it would have a useful life of 3 years before the same type of repairs would be needed again. Neither tank has any scrap value. Money is worth 9% if compounded annually. If both tanks have equivalent capitalized costs, how much can be spent for repairing the existing tank. 2. Calculate the Net present value of the project of which details are given below. The Project Consideration is being given to a plant which is expected to be replaced by a smaller one in five years time. The required investment is $ 80,000 for equipment (which qualifies for a 30% grant) and $ 40,000 for working capital (which does not). Grants are received and taxes are payable one year after the period they belong. The salvage value receivable in year 6 is expected to be $8,000. Company tax is 30%. Assume straight line depreciation for tax purposes. The gross profit, before taxation or depreciation and discount factors are: Year (n) Gross profit 1/(1 + i)n 1 9,000 0.9091 2 13,000 0.8264 3 21,000 0.7513 4 33,000 0.6830 5 37,000 0.6209 6 0.5645