BSIE Bachelor of Science in Industrial Engineering: Engineering Economics 3 — Questions and Answers
Question 1: Two mutually exclusive projects have IRRs of 18% and 22%. The one with 18% IRR has a larger initial investment. At a MARR of 12%, you should:
- Always choose the higher IRR project
- Perform incremental IRR analysis to decide (Correct answer)
- Choose neither since both exceed MARR
- Choose the lower-investment project
Correct answer: Perform incremental IRR analysis to decide
Incremental IRR on the additional investment determines whether the larger project's extra cost is justified.
Question 2: Which of the following is a sunk cost that should be EXCLUDED from a replacement analysis?
- Annual operating cost of the new machine
- Salvage value of the defender
- Original purchase price of the defender already paid (Correct answer)
- Installation cost of the challenger
Correct answer: Original purchase price of the defender already paid
Sunk costs are past expenditures that cannot be recovered and are irrelevant to future decisions.
Question 3: A project generates cash flows of $5,000/yr for 10 years. If MARR = 10%, the present worth factor (P/A,10%,10) = 6.145. What is the PW?
- $25,000
- $30,725 (Correct answer)
- $50,000
- $61,450
Correct answer: $30,725
PW = $5,000 × 6.145 = $30,725.
Question 4: The Modified Accelerated Cost Recovery System (MACRS) is used in the US primarily for:
- Financial reporting depreciation
- Tax depreciation (Correct answer)
- Engineering economic analyses only
- Straight-line depreciation calculations
Correct answer: Tax depreciation
MACRS is the IRS-mandated system for calculating depreciation deductions on tax returns.
Question 5: In a cost-benefit analysis for a public project, if B/C = 0.85, the project should be:
- Accepted since costs are under $1
- Rejected since benefits do not justify costs (Correct answer)
- Accepted if MARR > 10%
- Reconsidered only if salvage value is added
Correct answer: Rejected since benefits do not justify costs
A B/C ratio below 1.0 means costs exceed benefits, indicating the project is not economically justified.
Question 6: Which interest rate converts a nominal rate compounded monthly to an equivalent annual rate?
- Nominal annual rate
- Effective annual interest rate (EAR) (Correct answer)
- Continuous compounding rate
- Periodic monthly rate
Correct answer: Effective annual interest rate (EAR)
The EAR accounts for compounding frequency: EAR = (1 + r/m)^m − 1.
Question 7: When using the AW method to compare alternatives with different lives, the standard approach is to:
- Extend both to the LCM of their lives
- Assume each repeats indefinitely over its own cycle (Correct answer)
- Compare over the shorter life only
- Use a 30-year study period for all cases
Correct answer: Assume each repeats indefinitely over its own cycle
AW implicitly assumes repeatability, so each alternative's AW represents cost per year over infinite repetitions.
BSIE Bachelor of Science in Industrial Engineering: Engineering Economics 3
Two mutually exclusive projects have IRRs of 18% and 22%.
The one with 18% IRR has a larger initial investment.
At a MARR of 12%, you should: