CCP Economic Analysis and Engineering Economics 2 — Questions and Answers
Question 1: Which depreciation method allocates an equal amount of depreciation expense in each year of an asset's useful life?
- Declining Balance Method
- Sum-of-Years-Digits Method
- Straight-Line Method (Correct answer)
- MACRS Method
Correct answer: Straight-Line Method
The straight-line method spreads the depreciable cost (cost minus salvage value) evenly over the useful life, yielding a constant annual depreciation charge.
Question 2: The Modified Accelerated Cost Recovery System (MACRS) is primarily used for:
- Calculating economic depreciation for NPV analysis
- Federal income tax depreciation in the United States (Correct answer)
- Financial statement depreciation under GAAP
- Estimating asset replacement costs in cost engineering
Correct answer: Federal income tax depreciation in the United States
MACRS is the depreciation system mandated by the U.S. IRS for calculating tax deductions, allowing accelerated write-offs in the early years of asset life.
Question 3: What is the Minimum Attractive Rate of Return (MARR) in engineering economic analysis?
- The risk-free rate used to evaluate government infrastructure projects
- The average historical return of the stock market
- The minimum return threshold an organization requires before accepting an investment (Correct answer)
- The discount rate at which NPV equals zero for the marginal project
Correct answer: The minimum return threshold an organization requires before accepting an investment
MARR is a management-set threshold reflecting the opportunity cost of capital; projects must earn at least this rate to be economically acceptable.
Question 4: When comparing two mutually exclusive alternatives with different useful lives, the most rigorous approach is to use:
- NPV evaluated only over the shorter alternative's life
- The Annual Worth Method or a Least Common Multiple (LCM) study period (Correct answer)
- Payback period comparison
- IRR comparison using each alternative's own life span
Correct answer: The Annual Worth Method or a Least Common Multiple (LCM) study period
The Annual Worth Method or LCM study period ensures alternatives are compared on an equivalent time basis, avoiding distortion from unequal lifespans.
Question 5: In a public-sector Benefit-Cost Analysis, 'disbenefits' are best described as:
- Costs incurred by the sponsoring government agency
- Negative consequences or losses experienced by the public due to the project (Correct answer)
- Maintenance costs that reduce the project's net benefit
- Inflation adjustments applied to projected benefits
Correct answer: Negative consequences or losses experienced by the public due to the project
Disbenefits are disadvantages or negative impacts borne by the public (not the project sponsor), such as traffic disruption during construction, subtracted from gross benefits.
Question 6: Sensitivity analysis in economic decision-making is best described as:
- A probabilistic simulation of thousands of possible cost outcomes
- Examining how changes in one or more key input variables affect the economic outcome (Correct answer)
- Testing the environmental impact sensitivity of a project site
- Assessing worker sensitivity to changes in project working conditions
Correct answer: Examining how changes in one or more key input variables affect the economic outcome
Sensitivity analysis systematically varies key assumptions (e.g., interest rate, cost, revenue) to determine how robust an economic decision is to uncertainty in inputs.
Question 7: Which of the following is the best example of an 'external cost' (externality) in economic analysis?
- Labor wages paid to workers on a construction project
- Procurement costs for raw materials
- Air and noise pollution from a factory affecting the surrounding community (Correct answer)
- Depreciation of capital equipment over its useful life
Correct answer: Air and noise pollution from a factory affecting the surrounding community
External costs are costs imposed on third parties outside the economic transaction, such as pollution damage borne by the community rather than the producer.
CCP Economic Analysis and Engineering Economics 2
Which depreciation method allocates an equal amount of depreciation expense in each year of an asset's useful life?