BSEM Engineering Economics & Cost Estimation 2 — Questions and Answers
Question 1: Which type of cost remains constant regardless of changes in production or activity level?
- Variable cost
- Marginal cost
- Fixed cost (Correct answer)
- Incremental cost
Correct answer: Fixed cost
Fixed costs such as rent or insurance do not change with production volume within a relevant operating range.
Question 2: The Internal Rate of Return (IRR) is best defined as:
- The discount rate at which NPV equals zero (Correct answer)
- The ratio of annual profit to total investment
- The average return on assets over a project's life
- The minimum attractive rate of return set by management
Correct answer: The discount rate at which NPV equals zero
IRR is the discount rate that makes a project's net present value exactly equal to zero, representing its true yield.
Question 3: A project's 'life cycle cost' includes which of the following?
- Only initial capital and construction costs
- Only operating and maintenance expenses
- All costs from design through disposal, including operation and decommissioning (Correct answer)
- Only labor and material costs during construction
Correct answer: All costs from design through disposal, including operation and decommissioning
Life cycle cost encompasses every cost phase from initial design and construction through operation, maintenance, and eventual disposal.
Question 4: What is the break-even point in engineering economics?
- The production level at which total revenue equals total cost (Correct answer)
- The point where marginal cost exceeds marginal revenue
- The level of investment that maximizes return on equity
- The moment when depreciation expense equals salvage value
Correct answer: The production level at which total revenue equals total cost
At the break-even point, total revenue exactly covers total cost, resulting in zero profit or loss.
Question 5: Overhead costs in a construction project are best described as:
- Direct material costs tied to specific work activities
- Indirect costs not directly attributable to a single work item (Correct answer)
- Profit margin added to direct costs
- Equipment purchase prices
Correct answer: Indirect costs not directly attributable to a single work item
Overhead costs—such as site supervision, utilities, and administrative expenses—support the project but cannot be assigned to one specific task.
Question 6: Which estimating technique divides a project into individual work packages and sums their costs to determine total project cost?
- Analogous estimating
- Parametric estimating
- Bottom-up estimating (Correct answer)
- Expert judgment
Correct answer: Bottom-up estimating
Bottom-up estimating builds the total cost by estimating each work package individually and aggregating all values upward.
BSEM Engineering Economics & Cost Estimation 2
Which type of cost remains constant regardless of changes in production or activity level?