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Chapter 5: Present Worth Analysis Learning Outcomes Quiz

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Questions and Answers

When evaluating different-life alternatives, what are the assumptions of the LCM approach?

Service provided is needed over the LCM or more years, and cash flow estimates are the same for each life cycle (correct)
Service provided is needed over the LCM or more years, and selected alternative can be repeated over each life cycle of LCM in exactly the same manner
Cash flow estimates are the same for each life cycle, and selected alternative can be repeated over each life cycle of LCM in exactly the same manner
Service provided is needed over the LCM or more years, and short study periods are often defined by management when business goals are short-term

In the context of evaluating different-life alternatives, what is the purpose of using a study period?

To select the alternative with the highest present worth value
To compare alternatives for equal service
To specify a time frame for ignoring all cash flows after this time (correct)
To identify the alternative with the lowest annual cost

What is the purpose of using present worth analysis with a specified study period?

To find the future worth of different-life alternatives
To identify the alternative with the lowest annual cost
To select the alternative with the highest present worth value (correct)
To compare alternatives for equal service

What should be disregarded in present worth evaluation when using a study period?

All estimates after the study period (A) Signup and view all the answers

When comparing machines using present worth analysis at a specified interest rate, which factor determines whether to repurchase a machine after a certain number of years?

Salvage value (D) Signup and view all the answers

When formulating alternatives, what is the difference between mutually exclusive and independent projects?

Mutually exclusive projects compete against each other, while independent projects compete only against the Do Nothing alternative (C) Signup and view all the answers

In cash flow estimates, what is the main difference between Revenue and Cost alternatives?

Revenue alternatives include estimates of costs and revenues, while Cost alternatives include only costs and assume equal revenues and savings for all options (C) Signup and view all the answers

What does PW Analysis of Alternatives involve?

Converting all cash flows to present worth (PW) using the Minimum Acceptable Rate of Return (MARR) (D) Signup and view all the answers

In the evaluation of alternatives using PW, what does a PW of 0 indicate for one project?

It is justified (A) Signup and view all the answers

For mutually exclusive alternatives, how should the selection be made based on PW analysis?

Select one with numerically largest PW (D) Signup and view all the answers

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