CCP Economic Analysis and Engineering Economics 1 — Questions and Answers
Question 1: What does Net Present Value (NPV) represent in project economic analysis?
- The total undiscounted cash flows of a project over its life
- The present value of all future cash inflows minus the present value of all cash outflows (Correct answer)
- The average annual return on investment expressed in today's dollars
- The ratio of discounted benefits to discounted costs
Correct answer: The present value of all future cash inflows minus the present value of all cash outflows
NPV is the difference between the present value of all cash inflows and outflows discounted at the required rate of return, measuring whether an investment creates value.
Question 2: Which discount rate makes the Net Present Value (NPV) of a project exactly equal to zero?
- The Minimum Attractive Rate of Return (MARR)
- The Weighted Average Cost of Capital (WACC)
- The Internal Rate of Return (IRR) (Correct answer)
- The risk-free rate
Correct answer: The Internal Rate of Return (IRR)
The IRR is by definition the discount rate at which NPV equals zero, representing the project's true rate of return.
Question 3: A project requires an initial investment of $120,000 and generates $30,000 in net cash flow each year. What is the simple payback period?
- 3 years
- 4 years (Correct answer)
- 5 years
- 6 years
Correct answer: 4 years
Simple payback period = Initial Investment / Annual Cash Flow = $120,000 / $30,000 = 4 years.
Question 4: The 'time value of money' concept in engineering economics is fundamentally based on which principle?
- Inflation always erodes the purchasing power of future cash flows
- A dollar available today is worth more than a dollar available in the future due to its earning potential (Correct answer)
- Future revenues are inherently uncertain and must be discounted for risk
- Interest rates compound over time, increasing the value of savings
Correct answer: A dollar available today is worth more than a dollar available in the future due to its earning potential
Time value of money holds that a present dollar can be invested to earn a return, making it worth more than the same dollar received in the future.
Question 5: What is the Present Worth Factor (P/F, i%, n) formula used in engineering economics?
- (1 + i)^n
- 1 / (1 + i)^n (Correct answer)
- i(1 + i)^n / [(1 + i)^n - 1]
- [(1 + i)^n - 1] / i
Correct answer: 1 / (1 + i)^n
The Present Worth Factor (P/F) = 1/(1+i)^n converts a single future value to its equivalent present value by discounting at rate i for n periods.
Question 6: What is the Benefit-Cost Ratio (BCR) decision rule for accepting a project?
- Accept if BCR > 0
- Accept if BCR ≥ 1.0 (Correct answer)
- Accept if BCR equals the MARR
- Accept if BCR < 1.0
Correct answer: Accept if BCR ≥ 1.0
A BCR ≥ 1.0 means the present value of benefits equals or exceeds the present value of costs, indicating the project is economically justified.
Question 7: The Capital Recovery Factor (A/P, i%, n) in engineering economics is used to:
- Find the future value of a present lump sum
- Convert a present sum into an equivalent uniform series of annual payments (Correct answer)
- Calculate the salvage value of a depreciating asset
- Determine the inflation-adjusted cost of capital
Correct answer: Convert a present sum into an equivalent uniform series of annual payments
The Capital Recovery Factor converts a present investment (P) into an equivalent uniform annual payment series (A), such as converting a loan into annual installments.
CCP Economic Analysis and Engineering Economics 1
What does Net Present Value (NPV) represent in project economic analysis?