CCE CCE Financial Analysis & Economic Evaluation 2 — Questions and Answers
Question 1: Which economic analysis method is used to convert all costs and benefits to an equivalent annual amount over the project life?
- Net Present Value (NPV)
- Annual Worth (AW) method (Correct answer)
- Payback Period method
- Future Worth method
Correct answer: Annual Worth (AW) method
The Annual Worth (AW) method converts all cash flows to a uniform equivalent annual amount, making it useful for comparing alternatives with different lives.
Question 2: In engineering economics, the 'time value of money' concept means:
- Money loses value due to inflation only
- A dollar received today is worth more than a dollar received in the future (Correct answer)
- Future cash flows are always more valuable than current ones
- All cash flows must be adjusted for taxes
Correct answer: A dollar received today is worth more than a dollar received in the future
The time value of money reflects that money available today can be invested to earn returns, making present dollars more valuable than the same amount received in the future.
Question 3: What is the MACRS (Modified Accelerated Cost Recovery System) primarily used for in the United States?
- Calculating the benefit-cost ratio of public projects
- Federal income tax depreciation of business assets (Correct answer)
- Determining asset salvage values
- Computing project Net Present Value
Correct answer: Federal income tax depreciation of business assets
MACRS is the U.S. federal income tax depreciation system that assigns assets to recovery classes and accelerates deductions in earlier years.
Question 4: A cost engineer is comparing two mutually exclusive alternatives using incremental analysis. The incremental IRR should be compared to:
- The higher alternative's IRR
- The lower alternative's total cost
- The MARR (Minimum Attractive Rate of Return) (Correct answer)
- The payback period of both alternatives
Correct answer: The MARR (Minimum Attractive Rate of Return)
In incremental analysis, the incremental IRR of the higher-cost alternative over the lower-cost one must exceed the MARR to justify the additional investment.
Question 5: Which of the following best describes 'sunk cost' in economic decision-making?
- A future cost that can be avoided by a decision
- A cost already incurred that cannot be recovered regardless of future decisions (Correct answer)
- The variable cost associated with increasing production
- The opportunity cost of selecting one alternative over another
Correct answer: A cost already incurred that cannot be recovered regardless of future decisions
A sunk cost is a past expenditure that cannot be recovered and should not influence future economic decisions.
Question 6: What is the effective annual interest rate equivalent to a nominal rate of 12% compounded monthly?
- 12.00%
- 12.36%
- 12.68% (Correct answer)
- 13.00%
Correct answer: 12.68%
Using (1 + 0.12/12)^12 − 1 = (1.01)^12 − 1 ≈ 0.1268 or 12.68%, the effective annual rate exceeds the nominal rate due to monthly compounding.
CCE CCE Financial Analysis & Economic Evaluation 2
Which economic analysis method is used to convert all costs and benefits to an equivalent annual amount over the project life?