Bachelor of Science in Industrial Engineering: Engineering Economics Flashcards

A gradient series increases by $500 each year starting in year 2. The gradient present worth factor (P/G, 10%, 5) = 6.862. What is the PW of the gradient alone?

Answer: $3,431

PW of gradient = G × (P/G, i, n) = $500 × 6.862 = $3,431.

In after-tax economic analysis, the after-tax cash flow (ATCF) is calculated as:

Answer: BTCF − Taxes

ATCF = Before-tax cash flow (BTCF) minus taxes owed on taxable income.

Economic order quantity (EOQ) minimizes the sum of which two inventory costs?

Answer: Holding cost and ordering cost

EOQ balances annual holding (carrying) costs against annual ordering costs to find the minimum total.

A geometric gradient has a base cash flow of $2,000 growing at 5% per year for 8 years with i = 10%. The correct present worth formula is:

Answer: P = A₁ × [(1−(1+g)^n(1+i)^−n)/(i−g)]

The geometric gradient PW formula adjusts for the growth rate g when i ≠ g.

If inflation is 4% and the market (nominal) interest rate is 9%, the real interest rate is approximately:

Answer: 4.8%

Real rate ≈ (1.09/1.04) − 1 ≈ 4.81%, often approximated as 9% − 4% = 5%.

Which analysis technique is best for comparing projects when the available budget is limited and projects can be partially funded?

Answer: Profitability index (PI) ranking

The profitability index (NPV/initial investment) ranks projects by value per dollar invested for capital rationing.

The defender in a replacement study is best described as:

Answer: The existing asset currently in service

The defender is the currently owned asset being evaluated against the potential replacement (challenger).