EIT Engineering Economics 1 — Questions and Answers
Question 1: What is the present value of $10,000 received in 5 years at a discount rate of 8%?
- $6,806 (Correct answer)
- $7,350
- $8,000
- $14,693
Correct answer: $6,806
PV = FV/(1+i)ⁿ = 10000/(1.08)⁵ = 10000/1.469 ≈ $6,806.
Question 2: Which method computes the rate of return at which the net present value of a project equals zero?
- Net Present Value (NPV)
- Payback Period
- Internal Rate of Return (IRR) (Correct answer)
- Benefit-Cost Ratio
Correct answer: Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is the discount rate at which NPV = 0, representing the project's effective return.
Question 3: In engineering economics, what does MARR stand for?
- Minimum Acceptable Rate of Return (Correct answer)
- Maximum Allowable Return on Risk
- Monthly Accrual Rate Ratio
- Mean Annual Revenue Rate
Correct answer: Minimum Acceptable Rate of Return
MARR (Minimum Acceptable Rate of Return) is the minimum return a company requires before approving an investment.
Question 4: Depreciation using the straight-line method distributes the cost:
- More in early years
- More in later years
- Equally over the useful life (Correct answer)
- Based on actual use
Correct answer: Equally over the useful life
Straight-line depreciation spreads the cost minus salvage value equally across each year of the asset's useful life.
Question 5: What is the capital recovery factor (A/P, i, n) used to calculate?
- Present worth of a series of payments
- Future worth of a single payment
- Uniform annual payment equivalent to a present sum (Correct answer)
- Gradient series present worth
Correct answer: Uniform annual payment equivalent to a present sum
The capital recovery factor converts a present sum P into an equivalent uniform annual payment A over n periods at rate i.
Question 6: The payback period of a $50,000 investment that generates $10,000/year is:
- 2 years
- 3 years
- 5 years (Correct answer)
- 10 years
Correct answer: 5 years
Payback period = Initial Investment / Annual Cash Flow = $50,000 / $10,000 = 5 years.
EIT Engineering Economics 1
What is the present value of $10,000 received in 5 years at a discount rate of 8%?