BSIE Bachelor of Science in Industrial Engineering: Engineering Economics 5 — Questions and Answers
Question 1: A firm's weighted average cost of capital (WACC) is often used as:
- The inflation rate for after-tax analysis
- The minimum attractive rate of return (MARR) (Correct answer)
- The nominal interest rate for bond pricing
- The gradient growth rate
Correct answer: The minimum attractive rate of return (MARR)
WACC represents the blended cost of all financing sources and is a common basis for setting the MARR.
Question 2: An industrial engineer applies break-even analysis and finds Q_BE = 4,000 units. If expected demand is 3,500 units, the project:
- Earns a profit
- Operates at a loss (Correct answer)
- Exactly covers all costs
- Has zero fixed costs
Correct answer: Operates at a loss
Operating below the break-even quantity means total revenue is less than total cost, resulting in a loss.
Question 3: Which of the following correctly describes the relationship between the capital recovery cost (CR) and annual worth (AW)?
- AW = CR only when salvage value is zero
- AW = CR + AW of operating costs (Correct answer)
- AW = CR − annual savings
- CR is the future worth equivalent of AW
Correct answer: AW = CR + AW of operating costs
The total AW of an alternative equals its capital recovery cost plus the annual worth of all operating expenses.
Question 4: In the MACRS 5-year property class, what percentage is depreciated in year 1 (half-year convention)?
- 10%
- 20% (Correct answer)
- 25%
- 40%
Correct answer: 20%
Under MACRS, 5-year property uses a 200% declining balance; year 1 rate is 20% due to the half-year convention.
Question 5: Monte Carlo simulation in engineering economics is used to:
- Calculate a single deterministic NPV
- Model the probability distribution of economic outcomes by sampling random inputs (Correct answer)
- Replace sensitivity analysis entirely
- Determine the MARR from historical data
Correct answer: Model the probability distribution of economic outcomes by sampling random inputs
Monte Carlo simulation repeatedly samples uncertain input distributions to produce a distribution of possible NPVs or IRRs.
Question 6: When comparing mutually exclusive alternatives using present worth, the study period must be:
- Equal to the life of the shortest alternative
- The same for all alternatives being compared (Correct answer)
- Equal to the life of the longest alternative
- Set by the MARR value
Correct answer: The same for all alternatives being compared
A consistent study period is required so all alternatives are evaluated over the same time horizon for a valid PW comparison.
Question 7: A project has an NPV of $0 at i = 14%. What does this indicate?
- The project loses money
- The project earns exactly 14% return (the IRR equals 14%) (Correct answer)
- The project should be rejected
- The MARR must be raised
Correct answer: The project earns exactly 14% return (the IRR equals 14%)
NPV = 0 at a given interest rate means that rate is the project's internal rate of return (IRR).
BSIE Bachelor of Science in Industrial Engineering: Engineering Economics 5
A firm's weighted average cost of capital (WACC) is often used as: