CPE CPE Project Management & Engineering Economics 2 — Questions and Answers
Question 1: In engineering economics, what is 'internal rate of return' (IRR)?
- The discount rate at which a project's NPV equals zero (Correct answer)
- The company's minimum required return on investment
- The average annual profit divided by initial investment
- The return generated in the first year of operation
Correct answer: The discount rate at which a project's NPV equals zero
IRR is the discount rate that makes NPV equal to zero; projects are accepted when IRR exceeds the company's hurdle rate (minimum acceptable return).
Question 2: What is a 'change order' in a capital construction project?
- A formal document modifying the original scope, schedule, or cost of a contract (Correct answer)
- An emergency work authorization for safety repairs
- A purchase order for replacement parts
- A request to the utility company for additional power capacity
Correct answer: A formal document modifying the original scope, schedule, or cost of a contract
A change order is a mutually agreed-upon amendment to the contract that adjusts scope, price, or schedule when work differs from the original agreement.
Question 3: Which project delivery method is described as 'Design-Build'?
- A single contractor is responsible for both design and construction under one contract (Correct answer)
- The owner designs the project and competitively bids construction separately
- An engineer designs the project and manages construction as owner's agent
- Multiple prime contractors share design and construction responsibilities
Correct answer: A single contractor is responsible for both design and construction under one contract
In Design-Build, the owner contracts with a single entity responsible for completing both design and construction, reducing coordination risk and potentially shortening schedules.
Question 4: What does the '80/20 rule' (Pareto principle) suggest when applied to plant maintenance costs?
- Roughly 20% of equipment typically accounts for 80% of maintenance costs (Correct answer)
- 80% of failures occur in the first 20% of equipment life
- 20% more maintenance reduces failures by 80%
- 80% of preventive tasks can be done in 20% of available time
Correct answer: Roughly 20% of equipment typically accounts for 80% of maintenance costs
The Pareto principle predicts that a small fraction of assets usually drives the majority of maintenance expenditure, guiding prioritization efforts.
Question 5: In cost estimating, what is a 'contingency allowance'?
- A budget reserve for undefined scope or unforeseen conditions within the known project scope (Correct answer)
- The profit margin added by a contractor to the base estimate
- Funds set aside for approved scope additions
- Insurance premiums included in the project cost
Correct answer: A budget reserve for undefined scope or unforeseen conditions within the known project scope
Contingency is an allowance within the project budget to cover unknowns within the defined scope; it is not a slush fund for scope additions.
Question 6: What is the purpose of a 'pre-startup safety review' (PSSR) before commissioning new plant equipment?
- Verify that equipment has been installed correctly and safely before introducing hazardous materials or energy (Correct answer)
- Train operators on routine maintenance procedures
- Review the capital expenditure approval paperwork
- Conduct a final inspection of contractor invoices
Correct answer: Verify that equipment has been installed correctly and safely before introducing hazardous materials or energy
A PSSR is a systematic check required by OSHA PSM (29 CFR 1910.119) to confirm construction matches design intent and safety systems are operational before startup.
CPE CPE Project Management & Engineering Economics 2
In engineering economics, what is 'internal rate of return' (IRR)?