The questions in the first section are worth 4 points each; the questions in the second section are worth 15 points each. Total time for the exam is three hours.

Short Answer Section: 4 points each

1. A pre-tax analysis shows that, over a five-year study period, leasing and buying a particular machine are equally attractive options. If the company pays tax at 50%, and if the machine is in Asset Class 8 (20% declining-balance depreciation per year), which option will be favoured by an after-tax analysis over the same study period?

2. An after-tax analysis shows that, over a five-year study period, leasing and buying a particular machine are equally attractive options. (The company pays tax at 50%, and the machine is in Asset Class 8 (20% declining-balance depreciation per year).) If the analysis is now modified to take into account inflation at 10% per annum, which option will be favoured?

3. What are the tax advantages and disadvantages of forming a corporation, rather than being a single proprietor?

4. Give brief definitions of:
   • The internal rate of return
   • The external rate of return
   • The auxiliary rate of return
   • The minimum acceptable rate of return

5. What is the difference between microeconomics and macroeconomics?

6. You are going to receive $1,000 over the course of a year, at a nominal interest rate of 10% per annum. Order these four methods of computing cashflow and interest from the one which gives you the greatest amount at the end of the year to the one which gives you the least. (You don't need to calculate any amounts explicitly.)
   • Discrete cash flow, annually compounded.
   • Continuous cash flow, annually compounded.
   • Discrete cash flow, continuously compounded.
   • Continuous cash flow, continuously compounded.

7. I invest $1,500 at 4% interest, compounded annually. Approximately how many years will it be before I have $6,000?

8. I have just bought an asset costing $80,000. There is a slight ambiguity in the tax rules: under one interpretation, I can depreciate it over ten years using the straight-line method. Under the second interpretation, I can depreciate it using the declining balance method at 10% per year. Which interpretation would I prefer?

9. My MARR is 10%. I have two proposals in front of me: Proposal A involves a large immediate investment, and yields a substantial payback at the end of three years; Proposal B involves a fixed annual expenditure, and a (larger) annual return. Present-worth analysis ranks both equally. If my MARR increases to 12%, which proposal will I favour?

   Long Answer Section

10. In a paragraph or less, describe the Monte Carlo method, the conditions under which you would use it, and how you would interpret its results.

11. Annual costs for two alternatives that perform the same service have been estimated as follows:

    End of Year	Alternative A	Alternative B
    	(Actual Dollars)	(Real Dollars)
    1	120	100
    2	132	110
    3	148	120
    4	160	130

    The inflation rate is 6% per year, and your real MARR is 9%. Which alternative would you choose?

12. A company is considering the following four projects (all sums in $000's):

    End of Year	A	B	C	D
    0	-100	-20	-120	-30
    1	40	6	25	6
    2	40	10	50	10
    3	60	10	85	19

    The following limitations hold:

    • No more than $140,000 can be spent at time 0
    • A and C are mutually exclusive.
    • To do either B or D, you must also do either A or C
    • B and D are mutually exclusive.

    Your MARR is 15%.

    List all feasible combinations of projects, and identify the best combination.

13. A company is considering the purchase of a new machine. It costs $9,600, and has a useful life of twelve years, after which it will have a salvage value of $1,600. It costs $2,100/year to operate.

    The machine falls into Asset class 8: declining balance depreciation at 20% per annum. Your company pays taxes at 50%, and your after-tax MARR is 8%. What is the after-tax equivalent annual cost of the machine?