BSIE Bachelor of Science in Industrial Engineering: Engineering Economics 4 ā Questions and Answers
Question 1: 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?
- $2,500
- $3,431 (Correct answer)
- $6,862
- $34,310
Correct answer: $3,431
PW of gradient = G Ć (P/G, i, n) = $500 Ć 6.862 = $3,431.
Question 2: In after-tax economic analysis, the after-tax cash flow (ATCF) is calculated as:
- BTCF + Taxes
- BTCF ā Taxes (Correct answer)
- BTCF Ć Tax rate
- Depreciation ā Taxes
Correct answer: BTCF ā Taxes
ATCF = Before-tax cash flow (BTCF) minus taxes owed on taxable income.
Question 3: Economic order quantity (EOQ) minimizes the sum of which two inventory costs?
- Setup cost and shortage cost
- Holding cost and ordering cost (Correct answer)
- Purchase price and holding cost
- Ordering cost and stockout cost
Correct answer: Holding cost and ordering cost
EOQ balances annual holding (carrying) costs against annual ordering costs to find the minimum total.
Question 4: 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:
- P = A(P/A, i, n)
- P = Aā Ć [(1ā(1+g)^n(1+i)^ān)/(iāg)] (Correct answer)
- P = A Ć (A/G, i, n)
- P = Aā/(i+g)
Correct answer: P = Aā Ć [(1ā(1+g)^n(1+i)^ān)/(iāg)]
The geometric gradient PW formula adjusts for the growth rate g when i ā g.
Question 5: If inflation is 4% and the market (nominal) interest rate is 9%, the real interest rate is approximately:
- 5%
- 4.8% (Correct answer)
- 13%
- 36%
Correct answer: 4.8%
Real rate ā (1.09/1.04) ā 1 ā 4.81%, often approximated as 9% ā 4% = 5%.
Question 6: Which analysis technique is best for comparing projects when the available budget is limited and projects can be partially funded?
- IRR ranking
- NPV ranking
- Profitability index (PI) ranking (Correct answer)
- AW method
Correct answer: Profitability index (PI) ranking
The profitability index (NPV/initial investment) ranks projects by value per dollar invested for capital rationing.
Question 7: The defender in a replacement study is best described as:
- The proposed new asset
- The existing asset currently in service (Correct answer)
- The asset with the lower annual cost
- The asset with the longer remaining life
Correct answer: The existing asset currently in service
The defender is the currently owned asset being evaluated against the potential replacement (challenger).
BSIE Bachelor of Science in Industrial Engineering: Engineering Economics 4
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?