Toronto Metropolitan University

DEPARTMENT OF ECONOMICS
ECN 801 Principles of Engineering Economics
Final Exam

TIME: 3 HOURS
DATE: Fall 2023

No electronic resources are permitted. Only hand-written notes are allowed. No

printed materials other than those provided at the exam are allowed.

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STUDENT’S FIRST NAME: ________________________________ (Please Print)

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***Note: The full exam paper needs to be submitted together with the
Akinidi form for your exam to count

Good Luck!!!!!!
 Appendix D
List of Formulas
After-tax IRR: • Uniform Series Compound Amount
IRRafter@tax ≅ IRRbefore@tax * (1 - t) Factor

After-tax MARR: (1 + i)N - 1

(F>A,i,N) =
i
MARRafter@tax ≅ MARRbefore@tax * (1 - t)
Benefit–Cost Ratio: • Capital Recovery Factor
PW(benefits) i(1 + i)N
BCR = (A>P,i,N) =
PW(costs) (1 + i)N - 1

Book Value, Declining-Balance: • Series Present Worth Factor

BVdb(n) = P(1 - d) n (1 + i)N - 1
(P>A,i,N) =
Book Value, Straight-Line: i(1 + i)N

P - S • Arithmetic Gradient to Annuity

BVsl(n) = P - n a b Conversion Factor
N
1 N
Capital Tax Factor: (A>G,i,N) = -
i (1 + i)N - 1
td(1 + i>2)
CTF = 1 - • Geometric Gradient Series to
(i + d )(1 + i)
Present Worth Conversion Factor
Capital Salvage Factor:
(P>A,i°,N)
td (P>A,g,i,N) =
CSF = 1 - 1 + g
(i + d )
(1 + i°)N - 1 1
Capitalized Value: (P>A,g,i,N) = ° ¢
i°(1 + i°)N 1 + g
A
P = 1 + i
i i° = - 1
1 + g
Capital Recovery Formula:
Depreciation Amount, Straight Line:
A = (P - S)(A>P,i,N) + Si
P - S
Compound Interest: Dsl(n) =
N
N
F = P(1 + i)
Depreciation Amount, Declining
Compound Interest Factors:
Balance:
• Compound Amount Factor
Ddb(n) = BVdb(n - 1) * d
(F>P,i,N) = (1 + i)N
Depreciation Rate:
• Present Worth Factor
n S
1 d = 1 -
(P>F,i,N) = AP
(1 + i)N
Effective Interest Rate:
• Sinking Fund Factor
r m
i ie = a1 + b - 1 or
(A>F,i,N) = m
(1 + i)N - 1
ie = (1 + is)m - 1

494

Z04_FRAS8826_07_SE_APPD.indd 494 07/10/20 3:28 PM

 List of Formulas 495

Effective Interest Rate for Continuous Linear Interpolation:

Compounding: y* - y1
x* = x1 + (x2 - x1) c d
ie = e r - 1 y2 - y1
Expected Value of the Discrete Modified Benefit–Cost Ratio:
Random Variable: PW(benefits) - PW(operating costs)

E(x) = a xip(xi)
BCRM = PW(capital costs )
Payback Period:
Financial Ratios:
First cost
Quick assets Payback period =
• Acid test ratio = Annual savings
Current liabilities
Real Dollars:
Current assets
• Current ratio = AN
Current liabilities R0,N =
I0,N >100
Total equity
• Equity ratio = AN
Total assets RN =
(1 + f )N
Sales
• Inventory turnover = RN = AN(P>F,f,N)
Inventories
Real MARR:
• Return on total assets =
1 + MARRC
Profits after taxes MARRR = - 1
1 + f
Total assets
Real Interest Rate:
Growth-Adjusted Interest Rate:
1 + i
1 + i i′ = - 1
i° = - 1 1 + f
1 + g
Real IRR:
Internal Rate of Return:
1 + IRRC
a
T (Rt - Dt) IRRR = - 1
t
= 0 or 1 + f
t = 0 (1 + i*)
Simple Interest Amount:
a (1 + i*)t = a (1 + i*)t
T Rt T Dt
Is = PiN
t=0 t=0

Z04_FRAS8826_07_SE_APPD.indd 495 07/10/20 3:28 PM

 Compound Interest Factors for Discrete Compounding, Discrete Cash Flows 473

i 5 6% Discrete Compounding, Discrete Cash Flows

Single Payment Uniform Series

Arithmetic
Compound Present Sinking Uniform Capital Series Gradient
Amount Worth Fund Series Recovery Present Series
Factor Factor Factor Factor Factor Worth Factor Factor
N (F/P,i,N) (P/F,i,N) (A/F,i,N) (F/A,i,N) (A/P,i,N) (P/A,i,N) (A/G,i,N)
1 1.0600 0.94340 1.0000 1.0000 1.0600 0.94340 0.00000
2 1.1236 0.89000 0.48544 2.0600 0.54544 1.8334 0.48544
3 1.1910 0.83962 0.31411 3.1836 0.37411 2.6730 0.96118
4 1.2625 0.79209 0.22859 4.3746 0.28859 3.4651 1.4272
5 1.3382 0.74726 0.17740 5.6371 0.23740 4.2124 1.8836
6 1.4185 0.70496 0.14336 6.9753 0.20336 4.9173 2.3304
7 1.5036 0.66506 0.11914 8.3938 0.17914 5.5824 2.7676
8 1.5938 0.62741 0.10104 9.8975 0.16104 6.2098 3.1952
9 1.6895 0.59190 0.08702 11.491 0.14702 6.8017 3.6133
10 1.7908 0.55839 0.07587 13.181 0.13587 7.3601 4.0220
11 1.8983 0.52679 0.06679 14.972 0.12679 7.8869 4.4213
12 2.0122 0.49697 0.05928 16.870 0.11928 8.3838 4.8113
13 2.1329 0.46884 0.05296 18.882 0.11296 8.8527 5.1920
14 2.2609 0.44230 0.04758 21.015 0.10758 9.2950 5.5635
15 2.3966 0.41727 0.04296 23.276 0.10296 9.7122 5.9260
16 2.5404 0.39365 0.03895 25.673 0.09895 10.106 6.2794
17 2.6928 0.37136 0.03544 28.213 0.09544 10.477 6.6240
18 2.8543 0.35034 0.03236 30.906 0.09236 10.828 6.9597
19 3.0256 0.33051 0.02962 33.760 0.08962 11.158 7.2867
20 3.2071 0.31180 0.02718 36.786 0.08718 11.470 7.6051
21 3.3996 0.29416 0.02500 39.993 0.08500 11.764 7.9151
22 3.6035 0.27751 0.02305 43.392 0.08305 12.042 8.2166
23 3.8197 0.26180 0.02128 46.996 0.08128 12.303 8.5099
24 4.0489 0.24698 0.01968 50.816 0.07968 12.550 8.7951
25 4.2919 0.23300 0.01823 54.865 0.07823 12.783 9.0722
26 4.5494 0.21981 0.01690 59.156 0.07690 13.003 9.3414
27 4.8223 0.20737 0.01570 63.706 0.07570 13.211 9.6029
28 5.1117 0.19563 0.01459 68.528 0.07459 13.406 9.8568
29 5.4184 0.18456 0.01358 73.640 0.07358 13.591 10.103
30 5.7435 0.17411 0.01265 79.058 0.07265 13.765 10.342
31 6.0881 0.16425 0.01179 84.802 0.07179 13.929 10.574
32 6.4534 0.15496 0.01100 90.890 0.07100 14.084 10.799
33 6.8406 0.14619 0.01027 97.343 0.07027 14.230 11.017
34 7.2510 0.13791 0.00960 104.18 0.06960 14.368 11.228
35 7.6861 0.13011 0.00897 111.43 0.06897 14.498 11.432
40 10.286 0.09722 0.00646 154.76 0.06646 15.046 12.359
45 13.765 0.07265 0.00470 212.74 0.06470 15.456 13.141
50 18.420 0.05429 0.00344 290.34 0.06344 15.762 13.796
55 24.650 0.04057 0.00254 394.17 0.06254 15.991 14.341
60 32.988 0.03031 0.00188 533.13 0.06188 16.161 14.791
65 44.145 0.02265 0.00139 719.08 0.06139 16.289 15.160
70 59.076 0.01693 0.00103 967.93 0.06103 16.385 15.461
75 79.057 0.01265 0.00077 1300.9 0.06077 16.456 15.706
80 105.80 0.00945 0.00057 1746.6 0.06057 16.509 15.903
85 141.58 0.00706 0.00043 2343.0 0.06043 16.549 16.062
90 189.46 0.00528 0.00032 3141.1 0.06032 16.579 16.189
95 253.55 0.00394 0.00024 4209.1 0.06024 16.601 16.290
100 339.30 0.00295 0.00018 5638.4 0.06018 16.618 16.371

Z01_FRAS8826_07_SE_APPA.indd 473 28/07/20 3:45 PM

 *** For the exam, unless otherwise specified make sure to follow course
conventions regarding the number of decimal places for interest rates and
interest factors. Interest rates should be correct to two decimal places (expressed
as a %) and calculated interest rate factors should be correct to four decimal
places (when not drawn from the factor tables). Students should use factor tables
whenever possible.

Choose the best answer for the questions below.

1) Find the effective monthly interest rate when the nominal rate is 7% with weekly
compounding. Be correct to 4 decimal places. The answer is within 0.0001% of
which of the following?

a) 0.5840%
b) 0.5842%
c) 0.5844%
d) 0.5846%
e) None of the above
2) You deposit $2000 into an account paying 9% compounded monthly. After one
year you withdraw $1000. How much do you have in the account at the end of
the 3-year period. The answer is within $1 of which of the following?

a) 1413
b) 1415
c) 1417
d) 1419
e) None of the above

3) You purchased a saw cutter five years ago for $24,000. You project a $7000
salvage value in two years’ time. Depreciation follows the declining balance
method with a depreciation rate of 25%. Find the depreciation value for this year.
The answer is within $1 of which of the following?

a) 1890
b) 1892
c) 1894
d) 1896
e) None of the above
4) Suppose you deposit $1000 each year for 5 years into an account earning 6% per
year. What is the balance of the account immediately after the final deposit? The
answer is within $2 of which of the following?

a) 5637
b) 5641
c) 5645
d) 5649
e) None of the above

5) You deposited $10,000 into an account paying 6% interest with the intention of
withdrawing funds each year for 12 years. You would like the account to have a
$3000 balance at the end of the 12-year period. How much can you withdraw each
year? The answer is within $3 of which of the following.

a) 1009
b) 1015
c) 1021
d) 1027
e) None of the above
6) You would like to begin an annual deposit plan in order to fund your retirement.
You plan to retire in 20 years with enough funds in your account to be able to
withdraw $30,000 per year (at the end of each year) indefinitely retirement. You
will start with an initial one-time deposit of $100,000, and then add to it with the
annual deposits. You plan to stop depositing at the time of retirement. If the interest
rate is 6%, what is the annual deposit necessary to fund your retirement plan? The
answer is within $10 of which of the following?

a) 4834
b) 4854
c) 4874
d) 4894
e) None of the above
7) You purchase a home for $1.4 million, pay 20% as a down-payment and borrow
the rest. Your monthly mortgage payments are based on an interest rate of 6%
compounded monthly for the current 3-year term. The mortgage is to be amortized
over 20 years. Find the balance owing at the end of the term. Use the method that
finds the present value of remaining payments. The answer is within $500 of which
of the following?

a) 1,027,753
b) 1,028,753
c) 1,029,753
d) 1,030,753
e) None of the above
8) You invest $1000 into a project which returns $100 at the end of the first year, $200
at the end of the second year, $300 at the end of the third year, continuing to
increase the return by $100 each year for 20 years (20 payments). What is the
annual worth of the project at 6% per year? The answer is within $15 of which of
the following?

a) 683
b) 713
c) 743
d) 773
e) None of the above

9) A project returns $100 at the end of the first year, and each year thereafter the
return grows by an additional 8%. The project has a 20-year lifespan so in the end
there are 20 payments. All the funds are deposited into an account earning 6%.
What is the balance of the account at the end of the 20 years, immediately after
the 20th payment? The answer is within $10 of which of the following?

a) 7268
b) 7288
c) 7308
d) 7328
e) None of the above
10) How much is accumulated over 50 years in a fund that pays 6% compounded
yearly, if $1000 is deposited at the end of every fifth year? The answer is within
$100 of which of the following?

a) 51,506
b) 51,706
c) 51,906
d) 52,106
e) None of the above

11) A service project involves a first cost of $5,000 and returns $1500 a year for 5
years. The service will be required for 50 years so the intention is to repeat the
project in cycles over the required service life. MARR = 6%. Find the PW of the 50-
year service life of the project. The answer is within $20 of which of the following?

a) 4854
b) 4894
c) 4934
d) 4974
e) None of the above

12) Find the AW of a project that has a first cost of $20,000, a salvage value of $6,000
at the end of 5 years, and annual revenues of $4000. MARR = 6%. The answer is
within $10 of which of the following?
a) 336.4
b) 356.4
c) 376.4
d) 396.4
e) None of the above

13) Eric is opening an online fantasy football club. Eric invested $10,000 in developing
the app, and he intends to charge annual membership fees of $10 for each
member, and he intends to have no more than 100 registered users. He expects
to have the maximum number of 100 registered users on his launch date and
maintain that number indefinitely. The membership fees are collected at the
beginning of the membership year, not at the end. What is his discounted payback
period if his MARR = 6%?

a) 10
b) 12
c) 14
d) 16
e) None of the above
14) You invest $5000 into a project with expected returns of $1236 each year for five
years. MARR = 6%. Find the IRR of the project. The IRR is with 0.25% of which of
the following?

a) 6%
b) 6.5%
c) 7%
d) 7.5%
e) None of the above

15) You have a choice of one of two projects. The first project has a first cost of $1000
with a promised return after 2 years of $1400. The second project has a first cost
of $1500 and promised return of $2000 after 2 years. Your MARR = 6%. Find the
incremental IRR of the projects. The incremental IRR is within 0.25% of which of
the following?

a) 9.5%
b) 10%
c) 10.5%
d) 11%
e) None of the above
16) Consider a three-year project that first provides the operator an up-front payment
of $2000, then requires an investment of $5000 two years after, and then makes
the final payment to the operator of $2890 after one final year. MARR = 10%. Find
the ERR of the project. The ERR is within 0.5% of which of the following?

a) 11%
b) 12%
c) 13%
d) 14%
e) None of the above

17) Consider a three-year project that first provides the operator an up-front payment
of $2000, then requires an investment of $5000 two years after, and then makes
the final payment to the operator of $2890 after one final year. MARR = 10%. Find
the Approximated ERR of the project. The Approximated ERR is within 0.5% of
which of the following?

a) 11%
b) 12%
c) 13%
d) 14%
e) None of the above
18) You decide to earn extra money during your Engineering program by running an
uber service. You purchase a car for $60,000, which you expect to sell for $18,000
at the end of the 6-year degree. You expect annual costs for insurance,
maintenance and other expenses to total $7000 per year. You project to have
approximately 20 customers per shift, who you will drive 8km on average. You plan
on driving 80 days each year. What is the levelized cost per km of driving? MARR
= 6%. The answer is within 5 cents of which of the following?

a) 1.00
b) 1.10
c) 1.20
d) 1.30
e) None of the above
19) Salvador Industries bought land and built its plant 20 years ago. The depreciation
on the building is calculated using the straight-line method, with a life of 30 years
and a salvage value of $44,000. Land is not depreciated. The depreciation for the
equipment, all of which was purchased at the same time the plant was constructed,
is calculated using declining balance at a depreciation rate of 20%. Salvador
currently has two outstanding loans: one for $52,000 due December 31,2020, and
another one for which the next payment is due in four years. The values of balance
sheet entries should be calculated as correct to the nearest dollar.
Using the information from the balance sheet and paragraph above, find the value of
Retained Earnings. The answer is within $1,000 of which of the following?

a) 1,542,000
b) 1,544,000
c) 1,546,000
d) 1,548,000
e) None of the above
20) What is the equity ratio in the preceding question? The answer is within 0.01 of
which of the following?

a) 0.53
b) 0.55
c) 0.57
d) 0.59
e) None of the above
21) The current ratio for a firm is 1.23 currently. The firm has $12,000 in cash and
$140,000 in accounts receivable. The owner’s equity for the firm is $1.6 million.
Which of the following is the firm’s acid test ratio?

a) 1.06
b) 1.34
c) 1.67
d) 2.41
e) 2.65

22) Jonathan runs a car service. He uses Toyota RAV4’s. The vehicles cost $60,000
to buy, and they depreciate at 30% per year. O&M costs are $3000 for the first
year, increasing by 30% per year. MARR = 6%. Find EAC3. The answer is within
$100 of which of the following?

a) 19,932
b) 20,132
c) 20,332
d) 20,532
e) None of the above
23) Consider a defender that has a current market value of $20,000 and is
depreciating at 20% per year. It’s O&M costs for this year are $5000 increasing by
6000 per year. MARR = 6%. Find the AEC at the economic life of the asset. The
answer is within $10 of which of the following?

a) 10,181
b) 10,201
c) 10,221
d) 10,241
e) None of the above

24) Consider the information in the previous question. Suppose the asset is kept for
its economic life. What is the cost of keeping the asset for one additional year after
its service life? The answer is within $5 of which of the following?

a) 10,268
b) 10,288
c) 10,308
d) 10,328
e) None of the above
25) A house in Toronto cost $1 million three years ago. Houses have been increasing
in value by 12% per year on average. The average annual inflation rate over the
past 3 years has been 4.5%. What is the real dollar cost of houses? MARRR = 6%.
The answer is within $1000 of which of the following?

a) 1,229,134
b) 1,231,134
c) 1,233,134
d) 1,235,134
e) None of the above

26) A house in Toronto cost $1 million three years ago. Houses have been increasing
in value by 12% per year on average. The average annual inflation rate over the
past 3 years has been 4.5%. What is the present value of houses? MARRR = 6%.
The answer is within $2000 of which of the following?

a) 1,033,684
b) 1,037,684
c) 1,041,684
d) 1,045,684
e) None of the above
27) Consider a project with a first cost of $100,000 that earns an actual dollar return of
$70,000 each year for 2 years. The inflation rate is 12% in the first year and 8% in
the second year. MARRR = 6%. The IRRR is within 0.25% of which of the
following?

a) 12.5%
b) 13%
c) 13.5%
d) 14%
e) None of the above

28) Consider the construction of a 2nd lane on a roadway that allows vacationers to
save 3 hours in traffic jams on the way to their cottages. A conservative estimate
of the per vehicle benefit is $20 per hour. The 2nd lane allows the number of
vacationers to increase from 4000 to 5000 per week. What is the weekly benefit of
the project? The answer is within $5000 of which of the following?

a) 270,000
b) 280,000
c) 290,000
d) 300,000
e) None of the above
29) A public works project with a 20-year estimated project life has a first cost
$100,000 and a projected annual maintenance cost of $10,000. The annual
benefits are projected to be $25,000 per year. Project development is expected to
cause disruption to the local business community estimated at $40,000 in PW.
Find the Modified Benefit Cost ratio for the project. The social discount rate is 6%.
The answer is within 0.01 of which of the following?

a) 1.28
b) 1.30
c) 1.32
d) 1.34
e) None of the above

30) Two mutually exclusive options for expanding a park gazebo are under
consideration. Option 1 involves a PW benefit of $15,000 and a PW cost of
$13,000, whereas Option 2 involves a PW benefit of $12,000 and a PW cost of
$9,000. Not moving ahead with the project is also an option. The social discount
rate is 12%. Which of the following is the best course of action based on cost
benefit analysis?

a) Option 1
b) Option 2
c) Both options
d) Neither option
e) There is not enough information provided to determine the best course of action.
Solutions:

1. im = (1 + 0.07/52)52/12 – 1 = 0.0058464 or 0.5846%

2. im = 0.09/12 = 0.0075 or 0.75%
F = 2000(1.0075)12*3 – 1000(1.0075)12*2 = 1420.88
= 2000(1.3087) – 1000(1.1964) = 1421
3. D5 = 24,000(0.75)4(0.25) = 1898.44
4. F = 1000(F/A,6%,5) = 1000(5.6371) = 5637.10
5. 10,000(F/P,6%,12) = X(F/A,6%,12) + 3000
X = 1014.94
6. V20 = 30,000/0.06 = 100,000(F/P,6%,20) + X(F/A,6%,20)
X = 4874
7. A = 1,400,000(0.8)(A/P,0.5%,20*12=240) = 1,120,000(.0072) = 8064
B36 = 8064(P/A,0.5%,240-36=204) = 8064(127.6975) = 1,029,753
8. AW = -1000(A/P,6%,20) + 100 + 100(A/G,6%,20) = 773.33

= -1000(A/P,6%,20) + 100(A/G,6%,21)(F/A,6%,21)(A/F,6%,20) = 773.20

9. i0 = 1.06/1.08 – 1 = -0.0185 or -1.85%

F = 100(P/A,8%,6%, 20)(F/P,6%,20) = 100(22.6607)(3.2071) = 7267.51
10. A = 1000(A/F,6%,5) = 1000(0.1774) = 177.4
F = 177.4(F/A,6%,50) = 177.4(290.34) = 51,506.32
11. Acycle = -5000(A/P,6%,5) + 1500 = 313

P = 313(P/A,6%,50) = 4933.51

12. A = -20,000(A/P,6%,5) + 4000 + 6000(A/F,6%,5) = 316.40

13. 10,000 < 1000 + 1000(P/A,6%,N) for N = 14 or higher
14. PW = 0 = -5000 (P/A,i*,5) + 1236 (approx.) for i*= 7.5%
15. PW = 0 = -500 + 600(P/F,i*,2) for i* = 9.55%
16. PB2 = 2000(1.10)2 - 5000 = -2580
PW = 0 = -2580 + 2890(P/F,i*e,1) for ie* = 12%
17. F =2000(1.10)3 + 2890 = 5000(F/P,i*ea,1) ; iea* = 11.04%
18. -60,000(A/P,6%,6) + 18,000(A/F,6%,6) – 7000 + 40(80)8*C = 0
 C = $1.30
19. Building less Dep: 224k – 20(224k-44k)/30 = 104,000
Equipment less Dep: 460k(0.80)20 = 5303

Current Assets = 344k + 2860k + 2002k +162k = 5,368k

LT Assets Assets = 104k + 5303 + 525k = 634,303
Total Assets = 6,002,303 = Total L+OE

Current Liabilities = 949,303 + 52k + 30k = 1,031,303

LT Liabilities = 1,220k _+ 323k = 1,543,000
Total Liabilities = 2,574,303

Owner’s Equity = Total L+OE – Total Liabilities = 3,428,000

Retained Earnings = Owner’s Equity – Common Shares = 1,548,000
20. Owner’s Equity/Total Assets = 3,428,000/6,002,303 = 0.57
21. Acid Test Ratio must be lower than current ratio
22. EAC3 = 60k(A/P,6%,3) – (0.7)3(60k)(A/F,6%,3) + 3k[1/1.06 + 1.3/(1.06)2 +
1.32/(1.06)3 ](A/P,6%,3) = 19,932.09
23. AEC1 = 20,000(1.06) – (0.8)20,000 + 5000 = 10,200
AEC2*** = 20k(A/P,6%,2) – (0.8)2(20k)(A/F,6%,2) + (5k/1.06 +
6k/1.062)(A/P,6%,2) = 10,180.64
AEC3 = 20k(A/P,6%,3) – (0.8)3(20k)(A/F,6%,3) + (5k/1.06 + 6k/1.062 +
7k/1.063)(A/P,6%,3) = 10,226.89
24. C3 = (0.8)2(20k)(1.06) – (0.8)3(20k) + 7k = 10,328
25. R3 = 1m(1.12)3/(1.045)3 = 1,231,134
26. P = 1m(1.12)3/[(1.045)3(1.06)3] = 1,033,684
27. R1 = 70,000/(1.12) = 62,500; R2 = 70,000/(1.12*1.08) = 57,870.37
PW = 0 = -100,000 + 62,500(P/F,i*’,1) + 57,870.37(P/F,i*’,2)
PW(i*’=14%) = -646 and PW(i*’=13%) = 631; i*’ = 13.5%
28. ($20*3)*4000 + 0.5($20*3)*1000 = 270,000
29. MBCR = [25,000(P/A,6%,20) – 40,000 – 10,000(P/A,6%,20)]/100,000 = 1.32
30. (B1-B2)/(C1- C2) = (15k-12k)/(13k-9k) = 0.75 < 1 therefore option 2 is preferred to
option 1. B2/C2 > 1 therefore option 2 is preferred to do nothing.