Engineering Economics Flashcards

A project requires an investment of $200,000 and yields uniform annual revenues. The simple payback period is 5 years. What are the annual revenues?

Answer: $40,000

Simple payback = Initial cost / Annual revenue; Annual revenue = 200,000/5 = $40,000.

When using the annual worth (AW) method to compare alternatives with different lives, you should:

Answer: Compare AW values directly since they are already annualized

Annual worth is already expressed per year, so alternatives with different lives can be compared directly at their computed AW.

A firm buys equipment for $60,000 with a 5-year MACRS life. The Year 3 MACRS rate is 19.2%. What is the Year 3 depreciation?

Answer: $11,520

Year 3 depreciation = 0.192 × $60,000 = $11,520.

Which of the following is an example of an 'opportunity cost'?

Answer: The foregone return on invested capital used for a project

Opportunity cost is the benefit foregone by choosing one alternative over the next-best alternative.

A project produces after-tax cash flows of −$50,000 at t=0 and +$15,000 per year for 5 years. The NPV at MARR = 12% is approximately:

Answer: +$4,071

NPV = −50,000 + 15,000·(P/A,12%,5) = −50,000 + 15,000·3.605 = −50,000 + 54,075 ≈ +$4,075.

The economic service life of an asset is the age at which the:

Answer: Annual worth of costs is minimized

Economic service life is the number of years that minimizes the equivalent uniform annual cost (EUAC) of owning and operating the asset.

In a sensitivity analysis, a project's NPV is most sensitive to which variable if a 10% change in that variable causes the largest NPV change?

Answer: The variable causing the greatest absolute change in NPV

Sensitivity is measured by the magnitude of NPV change resulting from a given percentage change in the input variable.