BSIE Bachelor of Science in Industrial Engineering: Engineering Economics 2 — Questions and Answers
Question 1: A machine costs $50,000 and saves $12,000 per year. Using a MARR of 15%, what is the approximate payback period?
- 3.1 years
- 4.2 years (Correct answer)
- 5.5 years
- 6.8 years
Correct answer: 4.2 years
Simple payback = $50,000 / $12,000 ≈ 4.2 years (ignoring time value of money).
Question 2: Which depreciation method results in the highest depreciation expense in the first year for a $100,000 asset with a 5-year life?
- Straight-line
- Sum-of-years'-digits
- Double-declining balance (Correct answer)
- Units of production
Correct answer: Double-declining balance
Double-declining balance applies 2/n rate to book value, yielding the largest first-year deduction.
Question 3: The annual worth (AW) of a project is -$3,200. This means the project:
- Earns exactly the MARR
- Loses $3,200 per year compared to investing at the MARR (Correct answer)
- Has a negative first cost
- Should be accepted if MARR is below 10%
Correct answer: Loses $3,200 per year compared to investing at the MARR
A negative AW means the project fails to recover costs at the MARR and loses that amount annually in equivalent terms.
Question 4: In a lease-vs-buy analysis, which factor is unique to the lease option?
- Salvage value
- Maintenance costs
- Ownership tax benefits
- Lease payment as a tax-deductible expense (Correct answer)
Correct answer: Lease payment as a tax-deductible expense
Lease payments are fully deductible operating expenses, whereas ownership provides depreciation deductions instead.
Question 5: A bond with a face value of $1,000, coupon rate of 8%, and market interest rate of 10% will sell at:
- A premium (above $1,000)
- Par ($1,000)
- A discount (below $1,000) (Correct answer)
- Zero since coupon < market rate
Correct answer: A discount (below $1,000)
When the market rate exceeds the coupon rate, the bond must be discounted to compensate buyers.
Question 6: Sensitivity analysis in engineering economics is primarily used to:
- Calculate exact project NPV
- Identify which input variables most affect project viability (Correct answer)
- Determine the optimal depreciation method
- Set the MARR for a project
Correct answer: Identify which input variables most affect project viability
Sensitivity analysis varies one parameter at a time to reveal which assumptions most influence the decision.
Question 7: The capitalized cost of a perpetual investment is calculated as:
- P = A × (P/A, i, n)
- P = A / i (Correct answer)
- P = F × (P/F, i, n)
- P = A × (1 + i)^n
Correct answer: P = A / i
For an infinite series of equal payments, capitalized cost P = A/i as n approaches infinity.
BSIE Bachelor of Science in Industrial Engineering: Engineering Economics 2
A machine costs $50,000 and saves $12,000 per year.
Using a MARR of 15%, what is the approximate payback period?