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    This document contains 9 practice questions related to finance and economics. The questions cover topics such as break even analysis, compound interest calculation, net present value analysis, equipment purchase vs lease decisions, investment decision trees, and expected monetary value analysis. Sample questions include determining the number of units needed to be produced and sold for a company to break even, calculating the amount owed on a loan with interest compounded annually vs semiannually, and whether a company should drill for oil or sell an oil lease based on probability outcomes.

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    Orbit 1

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    This document contains 9 practice questions related to finance and economics. The questions cover topics such as break even analysis, compound interest calculation, net present value analysis, equipment purchase vs lease decisions, investment decision trees, and expected monetary value analysis. Sample questions include determining the number of units needed to be produced and sold for a company to break even, calculating the amount owed on a loan with interest compounded annually vs semiannually, and whether a company should drill for oil or sell an oil lease based on probability outcomes.

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    This document contains 9 practice questions related to finance and economics. The questions cover topics such as break even analysis, compound interest calculation, net present value analysis, equipment purchase vs lease decisions, investment decision trees, and expected monetary value analysis. Sample questions include determining the number of units needed to be produced and sold for a company to break even, calculating the amount owed on a loan with interest compounded annually vs semiannually, and whether a company should drill for oil or sell an oil lease based on probability outcomes.

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    59 views2 pages

    Orbit 1

    Uploaded by

    Pranav Mishra
    This document contains 9 practice questions related to finance and economics. The questions cover topics such as break even analysis, compound interest calculation, net present value analysis, equipment purchase vs lease decisions, investment decision trees, and expected monetary value analysis. Sample questions include determining the number of units needed to be produced and sold for a company to break even, calculating the amount owed on a loan with interest compounded annually vs semiannually, and whether a company should drill for oil or sell an oil lease based on probability outcomes.

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    Module 5 : Problems for Practice

    Question 5.1:

    Apex Ltd is considering expanding its production facility to manufacture an


    electrical component. Mr Verma, Production Manager, has been asked to determine how
    many; units must be produced and sold in order to break even. The fixed cost for
    new equipment and installation is Mu 100,000.Each unit produced has a variable cost
    of Mu 12 per unit and sells for Mu 20.

    Question 5.2 :

    Mr. Sharma borrowed Rs.500,000 from a local financing company. The loan is to be
    repaid at the end of 4 years at an interest rate of 14% per year, compounded
    annually. How much will Mr. Sharma owe in 4 years? How much will Mr. Sharma owe if
    the interest rate is compounded semiannually?

    Question 5.3:

    An industrial manufacturer wants to investigate the economics of investing in new


    machinery for its production plants. The initial cost of this new machinery will be
    Rs.95,000, with an estimated life of 20 years. If the equipment is purchased, the
    Vice-President of Manufacturing estimates that operating costs for the first 10
    years will be reduced by Rs.12,000 per year. For the next 5 years, annual operating
    costs will be reduced by Rs. 10,000 per year, and the remaining 5 years operating
    costs will be reduced by Rs.5,000 per year. Evaluate the option.

    Question 5.4:

    A machine needed for 3 years can be purchased for Mu 75,000 and sold at the end of
    period at about Mu 25,000. A comparable machine can be leased for Mu 30,000 per
    year. If the firm expects 20 % return, should it buy or lease the machine when end-
    of-year payments are expected?

    Question 5.5

    Two models of a small machine perform the same function. Type 1 machine has a low
    initial cost of Mu 9,500, relatively high operating costs of Mu 1,900 per year more
    than that of Type 2 machine, and a short life of 4 years. The more expensive
    machine, Type 2 machine costs Mu 25,000 and can be kept in service economically for
    8 years. Which machine would you prefer, if rate of return is 8 %?

    Question 5.6

    Suppose that a company manufacturing electronic calculators produced 10000


    calculators by employing 50 people at 8 hours/day for 25 days. Compute input,
    output and productivity. What is the efficiency if the target daily production is
    12000 calculators?

    Question 5.7

    A businessman has two independent investment options A and B available to him, but
    he lacks the capital to undertake both of them simultaneously. He can choose to
    take A first and then stop, or if A is successful, then take B or vise versa. The
    probability of success of A is 0.7, while for B it is 0.4. Both investments require
    an initial capital outlay of Mu . 2,000 and both return nothing if the venture is
    unsuccessful. Successful completion of A will return Mu. 3,000 (over cost), and
    Successful completion of B will return Mu. 5,000 (over cost). Draw decision tree
    and determine the best strategy.

    Question 5.8

    A company owns a lease on a certain property. It may sell the lease for Mu 12,000
    or it may drill the said property for oil. Various possible drilling results are as
    under along with the probabilities of happening and rupee consequences:

    Possible Results Probability Monetary consequences(in Mu)


    Dry well 0.10
    -1,00,000
    Gas well only 0.40 45,000
    Oil and gas combination 0.30 98,000
    Oil well 0.20 1,99,000

    Draw a decision tree diagram for the above problem and calculate EMV for the act
    drill. Should the company drill or sell?

    Question 5.9

    A manager has a choice between (i) A risky contract promising Mu 7 lakhs with
    probability 0.6 and Mu. 4 lakhs with probability 0.4 (ii) A diversified portfolio
    consisting of two contracts with independent outcomes and each promising Mu. 3.5
    lakhs with probability of 0.6 and Mu. 2 lakhs with probability 0.4. Construct a
    decision tree for using a EMV criterion. Can you arrive at the decision using EMV
    criterion?

    Prof.S.G.Deshmukh & Prof.Arun Kanda

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