Written midterm - 2012

The midterm will be on 29 October, 19:00 to 22:00. The topics covered will only be on Engineering Economics.

It will be written in T29 room 101.

Resources you will need:

• A list of the basic CRA classes for depreciation (see the section on 21 September)
• Inflation factors for the process industries

Questions in the midterm will be related to these topics:

1. Understand various definitions of “interest” and how each is calculated and used: simple, compound, nominal, and effective
2. Know how to calculate cash flows and exchange them for equivalent values at different times.
3. How do taxes affect the above?
4. What if all cash flows are negative? (e.g., a public works project)
5. Calculate values at any time period from the cash flow data if the interest rate is different for different periods.
6. Be able to work forwards, i.e. escalate values to a future time point, or backwards, i.e. deflate all values to their present value
7. Compare various methods of profitability mentioned in class
   • What are the advantages and disadvantages of each method
   • What similarities do the measurements have?
   • At what point in the planning of a project would each measure be appropriate?
   • What are the measurements trying to represent?
   • What are some simple measures of profitability that one could quickly do to see if a project makes any sense?

8. The calculation of DCFRR requires a trial and error solution. What is the most efficient way to accomplish this?
9. What are typical critical values for Payback Time (PT), Return on Investment (ROI), Discounted Cash Flow (DCF), and Minimal Acceptable Rate of Return (MARR)?
10. Find one more common measure of profitability (Ex. Equivalent Annual Worth or Annuity). How is it calculated and how does it compare to other measurements?
11. Discuss how the “value of money” is determined.
12. What factors affect cash flow? How are these factors calculated? e.g. inflation, depreciation, taxes
13. Set up a cash flow problem and calculate measures of profitability.

There are some practice problems posted on the course website from previous instructors.

Answering questions in the final exam

• You may bring in any printed materials to the exam; any textbooks, any papers, etc.
• You may use any calculator during the exam.
• You may answer the questions in any order in the answer booklet.
• Time saving tip: please use bullet points to answer, where appropriate, and never repeat the question back in your answer.
• If anything seems unclear, or information appears to be incomplete, please make a reasonable assumption and continue with the question.

How to prepare for the exam

• Understand the concepts being learned. My courses are not about applying the correct equation and solving.
• Check that your answers are reasonable and comment on whether they are, and especially if they seem unreasonable. This demonstrates that even though you have a calculation error, you have used your engineering judgement to identify that.
• Read the questions carefully: they are usually worded precisely. The biggest point where students loose marks is to answer only part of the question.
• Questions that you did on computer in the assignments: make sure you can repeat them by hand. Obviously not where you have to draw an entire economic analysis, but make sure the calculations can be done for one or two periods.
• Review and repeat all assignment questions that you do not understand. Do not rely on the assignment solutions: none of the final exam questions are going to be from the assignments (even with different values).
• I cannot emphasize this strongly enough, even though experience has shown me that most of you will disregard this advice: treat the exam as a closed-book test: have a formula sheet for the equations, and understand all the concepts without referring to a textbook. Textbooks and other papers should be used to refer to as a backup only.