STUDENT NAME (BLOCK CAPITALS): ---------------------------------------------------SECTION: --------------------------------------------------------------------------------------------STUDENT NUMBER: ------------------------------------------------------------------------------QUEENS UNIVERSITY KINGSTON, ONTARIO COMM 244 - SECTIONS D, E and

F PROJECT MANAGEMENT AND ECONOMICS TERM TEST #1 January 31, 2002 INSTRUCTORS Prof. P. J. Bamji & Prof. P. Roman This test constitutes 15% of your final marks INSTRUCTIONS: 1. 2. Time available 1 Hour Answers to ALL questions must be written in the space that is provided in this package. DO NOT USE RED COLOUR for your presentation in any form, written or pictorial (This colour is reserved for marking your submission) No books or notes are allowed in the class during this test. Use of Universityapproved, non-programmable, non-communicating calculators will be allowed ONLY. Do not remove any pages from the stapled package that is provided. Any detached pages must have your name and student number in the top right hand corner. If there is insufficient space, use the back of the page. Hand over the entire package to the proctor prior to leaving the room. If doubt exists as to the interpretation of any question, the candidate is urged to submit with the answer paper a clear statement of any assumptions made. The proctor or the instructor may not be able to answer your query during the test. Marks will be deducted if appropriate interest factors, their designations and appropriate values of interest rate (i) and period (n) are not indicated. There will be penalties if any of the above instructions are not followed.
Section 2.1 (10 Marks ) Section 2.2 (15 Marks) Section 2.3 (10 Marks) TOTAL (40 Marks)

3.

4.

5. 6.

7. 8.
Section 1 (5 Marks)

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SECTION 1: TRUE/FALSE circle 1 (1 mark each) 1. 2. 3. 4. 5. Interest is charged to borrowers primarily to cover administrative costs. Banks rarely charge simple interest. 1/(1+i)n is called the series compound amount factor. Engineering economics is very similar to macroeconomics. The techniques applied in engineering economics are applicable to personal investment decisions. T T T T T F F F F F

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SECTION 2: PROBLEMS 1. (10 Points) You have just purchased $20,000 worth of furniture from a local store that offers no payments and no interest for 24 months. With your keen sense of the time value of money, you open an investment savings account that pays 1.5% interest per month. What equal amount must you pay each month (making your first deposit at the end of the first month) into this account to have the $20,000 available at the end of 24 months to pay off the debt and avoid the stores 25% interest rate?

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2. An individual deposits an annual bonus into a savings account that pays 7% interest compounded annually. The size of the bonus increases by $1000 each year, and the initial bonus amount was $3000.
a. b. (5 Points) Draw the cash flow diagram. (5 Points) Determine the Present worth equivalent to the cash flow.

c. (5 Points) Determine how much will be in the account immediately after the 5 th deposit.

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3.

(10 Points) The Sporting News carried the following story on June 19, 1989: Dallas Cowbows quarterback, Troy Aikmen, the number one pick in the NFL draft, will earn either $11,406,000 over 12 years or $8,600,000 over 6 years. Aikmen, represented by Leigh Steinberg, must declare which plan he prefers. The $11 million package is deferred through the year 2000, while the non-deferred arrangement ends after the 1994 season. Regardless of which plan is chosen, Aikman will be playing through the 1994 season. Year 1989 1990 1991 1992 1993 1994 1994 1996 1997 1998 1999 2000 Totals: Deferred Plan $2,000,000 566,000 920,000 930,000 740,000 740,000 740,000 790,000 540,000 1,040,000 1,140,000 1,260,000 $11,406,000 Nondeferred Plan $2,000,000 900,000 1,000,000 1,225,000 1,500,000 1,975,000

$8,600,000

As it happens, Troy selected the non-deferred plan which was followed prior to his much publicised $50 million contract in 1993. In retrospect, if Aikmans interest rate were 6% compounded annually, did he make a wise decision in 1989 (from an economic perspective)? You must support your answer with appropriate calculations.

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