Practicing for Mock FE Exams
for Extra Credit
How does the Mock FE Exam Work
• Times are posted on the web under “Where We
Are” for Mock FE exam times
• You report at the appointed time armed with a
pencil and a simple calculator with no program
storage capability.
• You will be handed a Formula and Table Book,
a fun scribble in the circle answer sheet, and a
test booklet.
• At the appointed time you will be able to turn
over your test booklet and begin.
• You will have 18 minutes to solve 9 problems.
Continued Mock FE Exam
• The test book and answer sheet are gathered up
• Next the “Afternoon” Session exam and answer
sheet is passed out.
– It will have 6 questions and 24 minutes to solve
everything (4 minutes per question)
• After 24 minutes the answer sheet, test booklet,
and formula booklet are gathered up.
So What is this Great Slide Show?
• It is a training exercise for these mock FE
exams
• First the slides give you 6 “Morning
Session” like problems.
• Download the formula book and print it out
• Time yourself and give yourself 12
minutes to solve the problems.
• At the end of the 6 problems is an answer
key to check your answers
More on Using this Slide Show
• After the answer key are worked solutions
to the 6 problems in case you need to see
how the problem could be worked.
• Next there are 4 “Afternoon” Session like
problems.
• Give yourself 16 minutes and try to work
the problems.
• After the 4 problems is an answer key and
then worked solutions.
Your Mission
• Jim, should you decide to accept it is to
train your brain to pass these mock FE
exams and improve your grade in the
class.
• As always, should you or any cell in your
brain be fried or fail, the instructor will
disavow any knowledge of your actions.
Problem #1
• There Goes Your Cash money store lets
you write a check they will cash in 1
month. You write a check for $120 and
they give you $100 today. The effective
annual interest rate is most nearly
– A- 20%
– B- 240%
– C- 792%
– D- 1000%
Problem #2
• Lanny Lamebrain borrows $10,000 from
Larry Loanshark at 50% simple interest.
The loan will be paid back in 5 years in a
lump sum. How much will Lanny
Lamebrain have to pay Larry?
– A- $5,000
– B- $15,000
– C- $25,000
– D- $35,000
Problem #3
• Brian Bankborrow takes a personal loan for
$10,000 from a bank at 12% effective annual
interest compounded monthly and repayable in
monthly payments over 5 years. How much
interest will he pay the first month?
–
–
–
–
A- $5
B- $12
C- $100
D- $1200
Problem #4
• Brian Bankborrow takes a personal loan for
$10,000 from a bank at 12% effective annual
interest compounded monthly and repayable in
monthly payments over 5 years. Most nearly
what will be the amount of his monthly
payments?
–
–
–
–
A $60
B $100
C $222
D $1200
Problem #5
• Saluki University invests $10,000 in a new brain
for its Chancellor. The brain has a salvage
value of $1,000 after 9 years of use and will be
depreciated by straight line methods. The
annual depreciation on the brain is most nearly
–
–
–
–
A- $9
B- $100
C- $1000
D- $1120
Problem #6
• Saluki University considers installing coin operated toilet
paper dispensers in the bathrooms. A dispenser costs
$1200 and collects 25 cents for each lot of toilet paper it
dispenses. Maintenance and supply costs are 5 cents
for each lot of toilet paper. Most nearly how many lots of
toilet paper must be dispensed to break-even on the cost
of the toilet paper dispenser?
–
–
–
–
A – 1200
B- 6000
C- 24,000
D- 50,000
Answer Check Sheet
•
•
•
•
•
•
1 - C
2- D
3- C
4- C
5- C
6- B
Doing Problem #1
• One must first find the 1 month period interest
rate
– $120 check provides $100 cash and $20 interest to
be accrued over 1 month
– $20 is 20% of 100
• Thus the period or one month interest rate is 20%
• Next one uses the formula for F/P with
adaptation to isolate the interest rate after
compounding. n
((1i)  1) *100
Solving
• Substituting in 0.2 (or 20%) interest and
n=12 (for 12 compounding periods in a
year) the result is 791.6
• This is quite close to 792% for answer C
Solving Problem #2
• The formula for simple interest is
– Loan Amount * Rate * Number of Periods =
interest
– The interest is added to the loan amount to
get the total payment
– $10,000 * 0.5 * 5 = $25,000
– Plus the $10,000 originally borrowed
– Gives $35,000
– Answer D is $35,000
Solving Problem #3
• One first has to get the monthly interest
rate.
– Annual rate is 12% divided by 12 months in a
year is 1%
• Next one charges 1% interest on $10,000
– $10,000 * 0.01 = $100
• Answer C is $100
Solving Problem 4
• One first needs to get the period interest
rate for 1 month.
– 12% interest over 12 months = 1% per month
• One next uses A/P at 1% interest with 60
payments (12 months per year for 5 years)
– From the 1% interest table for n= 60 A/P is
0.0222
– $10,000 * 0.0222 = $222
• Answer C is $222
Solving Problem 5
• Straight Line Depreciation is
( InitialVal ue  SalvageValue)
LifeofAsset
Putting in $10,000 initial value and subtracting $1000 salvage value
Gives $9,000 for the numerator
The life of the asset is 9 years
$9,000/9 = $1000
Answer C is $1000
Solving Problem 6
• This is an algebra type of problem
– The profit on each lot of toilet paper is 25
cents – 5 cents or 20 cents
– The cost of the toilet paper dispenser is
$1200
– $1200 = X*0.2
– Solving for X, X = 6000
• Answer B is 6000
Afternoon Session
• Questions 1 to 4 refer to the following scenario
• Saluki University plans to install a group of
buildings called Dog Bone Way which will
consist of a new Football Stadium, Remodeled
Basketball Stadium, a new Student Services
Building, and a class room building for 83 million
dollars of which 10 million was raised from
donations before the project was complete.
Saluki University will borrow the rest of the
money at 4% interest and pay it back from
student fees and donations.
Question 1
• If the Dog Bone Way buildings cost $8,000,000
per year to service and maintain over the next
20 years what is the total equivalent annual cost
of the project if the original 10 million in
donations is deducted from the project’s initial
cost?
–
–
–
–
A - $5,400,000
B - $8,000,000
C- $12,100,000
D- $13,400,000
Question #2
• The City of Carbongale offered to raise it’s sales
tax by ½% in order to provide $1,000,000 per
year for 20 years to the Dog Bone Way project.
What is most nearly the present value of
Carbongale’s contribution?
–
–
–
–
A- $13,600,000
B- $15,100,000
C- $20,000,000
D- $29,800,000
Question #3
• Saluki University proposed to pay for the
educational enhancement provided by the new
facilities with a $128 per semester fee increase.
If the average enrollment for two semesters per
year was 18,000 students paying $128 each
semester for the next 20 years, most nearly what
would the present value of the contribution be?
–
–
–
–
A- $2,300,000
B- $4,600,000
C- $62,600,000
D- $67,000,000
Question 4
• If the $8,000,000 per year in maintenance
on the Dog Bone Way facilities is
presumed to go on indefinitely, what is the
capitalized cost of that maintenance at the
present time?
– A - $8,000,000
– B- $13,500,000
– C- $20,000,000
– D- $200,000,000
Answer Key
•
•
•
•
1–D
2- A
3–C
4-D
Solution to Question #1
• Equivalent annual cost is much the same as
total life cycle cost. One discounts all the money
back to the time when the asset enters service
(assumed to be time 0 in this case). Then one
uses an A/P to convert that cost to an equivalent
annuity.
– One recognizes $8,000,000 is already an annuity
– All one has to do is convert the remaining capital cost
of $73,000,000 into an annuity over 20 years.
Solution #1 continued
• Looking up A/P from the 4% interest table
for n=20 one finds 0.0736
• $73,000,000 * 0.0736 = $5,373,000,000
• Combine this with the $8,000,000 in
annual maintenance costs and one gets
about $13,373,000
• Answer D is $13,400,000
Solution #2
• Carbongale is offering $1,000,000 per
year for 20 years. This is an annuity. The
question is what is the NPV of that
annuity.
• We can solve this as $1,000,000 * P/A at
4% interest for 20 years
• Looking at the 4% interest table for 20
years one sees the P/A value is 13.59
• $1,000,000 * 13.59 = $13,590,000
• Answer A is $13,600,000
Solution #3
•
•
•
•
•
•
Question #3 is another annuity
The amount is 18,000 students
X 128 per semester
X 2 semesters per year
$4,600,000 per year
The 13.59 P/A value for 20 years at 4% remains
the same
• $4,600,000 * 13.59 = $62,515,000
• Answer C is $62,600,000
Solution #4
• The 4th question involves an $8,000,000
per year annuity that goes on indefinitely.
The capitalized cost refers to the present
value of that annuity.
• For an “infinite” annuity
– NPV = Annuity/ Interest rate
• $8,000,000 / 0.04 = $200,000,000
• D is $200,000,000