CPE Engineering Economics & Contract Management 2 — Questions and Answers
Question 1: A project has a Benefit-Cost Ratio (BCR) of 0.85. What does this indicate?
- The project returns $0.85 for every $1 invested (Correct answer)
- The project is economically viable
- The project generates 85% profit margin
- The discount rate is 85%
Correct answer: The project returns $0.85 for every $1 invested
A BCR less than 1.0 means the present value of benefits is less than costs, indicating the project is not economically justified.
Question 2: Under a Cost-Plus-Incentive-Fee (CPIF) contract, the fee increases when:
- The contractor exceeds the target cost
- The contractor underruns the target cost (Correct answer)
- The project schedule is delayed
- The owner requests additional scope
Correct answer: The contractor underruns the target cost
In a CPIF contract, the contractor earns a higher fee when actual costs fall below the target cost, sharing the savings with the owner.
Question 3: What is the Modified Internal Rate of Return (MIRR) designed to address?
- Multiple sign changes in cash flows causing multiple IRR values (Correct answer)
- Inflation adjustments in long-term projects
- Currency exchange risks
- Tax implications of depreciation
Correct answer: Multiple sign changes in cash flows causing multiple IRR values
MIRR resolves the problem of multiple IRR values that arise when a project's cash flow stream changes sign more than once.
Question 4: In contract law, 'liquidated damages' clauses must be:
- A genuine pre-estimate of loss, not a penalty (Correct answer)
- Set by the court after project completion
- Equal to the contractor's profit margin
- Approved by a third-party arbitrator
Correct answer: A genuine pre-estimate of loss, not a penalty
Liquidated damages must represent a reasonable estimate of the owner's actual loss at the time of contract formation to be enforceable.
Question 5: A machine costs $50,000 and has a salvage value of $5,000 after 9 years. Using straight-line depreciation, the annual depreciation charge is:
- $5,000 (Correct answer)
- $5,556
- $4,500
- $5,500
Correct answer: $5,000
Annual depreciation = ($50,000 - $5,000) / 9 = $45,000 / 9 = $5,000 per year.
Question 6: Which contract type places the MOST financial risk on the owner?
- Lump-sum fixed price
- Unit price
- Cost-plus-percentage-of-cost (Correct answer)
- Guaranteed maximum price
Correct answer: Cost-plus-percentage-of-cost
Cost-plus-percentage-of-cost contracts give the contractor no incentive to control costs since their fee grows as costs increase, maximizing owner risk.
Question 7: The capitalized cost of a project with an annual operating cost of $20,000 and an interest rate of 5% is:
- $100,000
- $200,000
- $400,000 (Correct answer)
- $1,000,000
Correct answer: $400,000
Capitalized cost for a perpetual series = Annual Cost / Interest Rate = $20,000 / 0.05 = $400,000.
CPE Engineering Economics & Contract Management 2
A project has a Benefit-Cost Ratio (BCR) of 0.85.
What does this indicate?