Engineering Economics & Cost Estimation Flashcards

Time value of money states that a dollar today is worth more than a dollar in the future because:

Answer: Money available now can be invested to earn returns

A dollar available today can be invested immediately to generate additional returns, making it more valuable than a future dollar.

What is contingency reserve in project cost management?

Answer: Funds set aside to cover identified risks and known unknowns

Contingency reserve is budgeted to address identified risks whose outcomes are uncertain but foreseeable.

Which economic analysis compares the annual costs of two or more alternatives over their useful lives?

Answer: Annual worth analysis

Annual worth analysis converts all costs and benefits to a uniform annual equivalent for direct comparison of alternatives.

In a make-or-buy decision, which factor most strongly favors the 'buy' option?

Answer: A vendor can supply the item at lower cost than internal production

When an external supplier can deliver the item at a lower total cost, the economic case favors purchasing over in-house manufacturing.

Cost-volume-profit (CVP) analysis is most useful for:

Answer: Understanding how changes in cost and volume affect profitability

CVP analysis reveals how varying production levels, selling prices, or costs shift a project's or business's profitability.

The Modified Accelerated Cost Recovery System (MACRS) is the U.S. tax depreciation method that:

Answer: Allows larger depreciation deductions in early years of asset ownership

MACRS front-loads depreciation, providing larger deductions in earlier years to accelerate tax savings for businesses.