BSE Engineering Economics and Financial Management 3

Question 1

What is the primary purpose of a sensitivity analysis in engineering economic decisions?

Accepted Answer

To determine how changes in input variables affect the outcome

Answer

Sensitivity analysis tests how sensitive an economic outcome (like NPV) is to changes in key assumptions such as cost, revenue, or discount rate.

Question 2

A company is comparing two mutually exclusive projects. Project A has a higher NPV but lower IRR than Project B. Which should be chosen?

Accepted Answer

Project A, because NPV is the superior decision criterion

Answer

When NPV and IRR conflict for mutually exclusive projects, NPV is the preferred criterion because it measures absolute value added to the firm.

Question 3

Which type of cost does NOT change with the level of production output?

Accepted Answer

Fixed cost

Answer

Fixed costs remain constant regardless of production volume and include items like rent, salaries, and insurance.

Question 4

What is working capital in financial management?

Accepted Answer

Current assets minus current liabilities

Answer

Working capital is the difference between current assets and current liabilities and measures a company's short-term operational liquidity.

Question 5

Which amortization method front-loads higher depreciation charges in the early years of an asset's life?

Accepted Answer

Double Declining Balance Method

Answer

The double declining balance method applies twice the straight-line rate to the asset's book value, resulting in higher early-year depreciation.

BSE - Mgt Bachelor of Science in Engineering Management Practice Test