EIT Engineering Economics 2 — Questions and Answers
Question 1: Which depreciation method results in higher depreciation in early years of asset life?
- Straight-line
- Units of production
- Modified Accelerated Cost Recovery System (MACRS) (Correct answer)
- Sum-of-years-digits
Correct answer: Modified Accelerated Cost Recovery System (MACRS)
MACRS (used for US tax purposes) accelerates depreciation with higher deductions in early years, reducing tax liability sooner.
Question 2: A benefit-cost ratio (BCR) of 1.5 indicates that:
- The project is marginally acceptable
- Benefits exceed costs by 50% (Correct answer)
- Costs exceed benefits
- The IRR equals the discount rate
Correct answer: Benefits exceed costs by 50%
BCR = Benefits/Costs = 1.5 means the project returns $1.50 for every $1.00 invested, a 50% excess of benefits over costs.
Question 3: The concept of 'time value of money' is based on:
- Inflation only
- Money available now is worth more than the same amount in the future (Correct answer)
- Future money is always worth more
- Interest rates are always positive
Correct answer: Money available now is worth more than the same amount in the future
Time value of money reflects that money available now can be invested to earn returns, making it worth more than the same amount received later.
Question 4: In a make-or-buy analysis, which costs should be included?
- Fixed costs only
- Incremental (marginal) costs only (Correct answer)
- All historical costs
- Sunk costs only
Correct answer: Incremental (marginal) costs only
Make-or-buy decisions should consider only incremental costs — those that change with the decision — not sunk or fixed costs unaffected by the choice.
Question 5: What is the future value of $5,000 invested for 10 years at 6% annual compound interest?
- $8,000
- $8,954 (Correct answer)
- $11,000
- $3,000
Correct answer: $8,954
FV = PV(1+i)ⁿ = 5000(1.06)¹⁰ = 5000 × 1.7908 ≈ $8,954.
Question 6: Life-cycle cost analysis (LCCA) considers:
- Only initial purchase price
- Only operating costs
- All costs from acquisition through disposal (Correct answer)
- Profit margins only
Correct answer: All costs from acquisition through disposal
LCCA evaluates the total cost of ownership over an asset's entire life, including design, procurement, operation, maintenance, and disposal.
EIT Engineering Economics 2
Which depreciation method results in higher depreciation in early years of asset life?