BSE Engineering Economics and Financial Management 1 — Questions and Answers
Question 1: What does the term 'time value of money' mean in engineering economics?
- Money available now is worth more than the same amount in the future (Correct answer)
- The cost of money increases with inflation only
- Future cash flows are always more valuable than present ones
- Money has no value until invested
Correct answer: Money available now is worth more than the same amount in the future
The time value of money reflects that a dollar today can be invested to earn returns, making it worth more than a dollar received in the future.
Question 2: Which capital budgeting method calculates the discount rate at which an investment's NPV equals zero?
- Net Present Value (NPV)
- Internal Rate of Return (IRR) (Correct answer)
- Payback Period
- Benefit-Cost Ratio
Correct answer: Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is the discount rate that makes the net present value of all cash flows from an investment equal to zero.
Question 3: A machine costs $50,000 and saves $12,000 per year. What is the simple payback period?
- 3 years
- 4 years
- 4.17 years (Correct answer)
- 5 years
Correct answer: 4.17 years
Simple payback period = Initial Cost / Annual Savings = $50,000 / $12,000 ≈ 4.17 years.
Question 4: Which depreciation method allocates an equal amount of cost each year over the asset's useful life?
- Double Declining Balance
- Sum-of-the-Years-Digits
- Straight-Line Depreciation (Correct answer)
- Units of Production
Correct answer: Straight-Line Depreciation
Straight-line depreciation spreads the cost evenly by dividing (cost minus salvage value) by the useful life.
Question 5: In engineering economics, what is the 'MARR'?
- Maximum Allowable Rate of Return
- Minimum Attractive Rate of Return (Correct answer)
- Market Average Rate of Risk
- Marginal Annual Revenue Ratio
Correct answer: Minimum Attractive Rate of Return
The Minimum Attractive Rate of Return (MARR) is the lowest rate of return a company will accept before undertaking an investment.
Question 6: What is a sunk cost in the context of engineering management decision-making?
- A future cost that can be avoided
- A cost that varies with production level
- A cost already incurred and non-recoverable (Correct answer)
- A fixed overhead cost
Correct answer: A cost already incurred and non-recoverable
Sunk costs are past expenditures that cannot be recovered and should not influence future investment decisions.
BSE Engineering Economics and Financial Management 1
What does the term 'time value of money' mean in engineering economics?