Engineering Economics and Financial Management Flashcards

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

Answer: To determine how changes in input variables affect the outcome

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

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

Answer: Project A, because NPV is the superior decision criterion

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

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

Answer: Fixed cost

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

What is working capital in financial management?

Answer: Current assets minus current liabilities

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

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

Answer: Double Declining Balance Method

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

In engineering project financing, what is the primary advantage of debt financing over equity financing?

Answer: Interest payments are tax-deductible

Interest paid on debt is tax-deductible, which effectively lowers the cost of borrowing and provides a tax shield for the company.