EIT Engineering Economics 2 — Questions and Answers
Question 1: An investment of $10,000 grows to $14,802 in 5 years with continuous compounding. What is the nominal annual interest rate?
- 6.0%
- 7.0% (Correct answer)
- 8.0%
- 9.0%
Correct answer: 7.0%
Using FV = PV·e^(rn): 14802 = 10000·e^(5r), so r = ln(1.4802)/5 ≈ 0.07 = 7%.
Question 2: A perpetuity pays $500 per year forever. If the interest rate is 8%, what is the present value?
- $4,000
- $5,000
- $6,250 (Correct answer)
- $6,000
Correct answer: $6,250
PV of a perpetuity = A/i = 500/0.08 = $6,250.
Question 3: A machine costs $50,000 and has a salvage value of $5,000 after 10 years. Using straight-line depreciation, what is the annual depreciation?
- $4,000
- $4,500 (Correct answer)
- $5,000
- $5,500
Correct answer: $4,500
Annual depreciation = (Cost − Salvage)/Life = (50,000 − 5,000)/10 = $4,500.
Question 4: Two mutually exclusive projects have IRRs of 12% and 15%. The MARR is 10%. Which project should be selected?
- Always the one with the higher IRR
- The one with the higher NPV at MARR (Correct answer)
- The one with the lower initial cost
- The one with the shorter payback period
Correct answer: The one with the higher NPV at MARR
For mutually exclusive projects, select by NPV or incremental IRR analysis, not simply highest IRR.
Question 5: What does the capital recovery factor (A/P, i, n) calculate?
- The future value of a present sum
- The annual payment to repay a present loan (Correct answer)
- The present value of a future sum
- The number of periods to double an investment
Correct answer: The annual payment to repay a present loan
The capital recovery factor converts a present amount P into an equivalent uniform annual series A.
Question 6: A bond with a face value of $1,000 pays 6% annual coupons and matures in 5 years. If the market interest rate is 8%, what is the bond's present value (approximately)?
- $920
- $921 (Correct answer)
- $1,000
- $1,082
Correct answer: $921
PV = 60·(P/A,8%,5) + 1000·(P/F,8%,5) = 60·3.993 + 1000·0.681 ≈ $921.
Question 7: Using the MACRS 5-year class, what percentage of the asset cost is depreciated in Year 1?
- 10%
- 15%
- 20% (Correct answer)
- 25%
Correct answer: 20%
MACRS 5-year class uses the half-year convention; Year 1 depreciation rate is 20%.
EIT Engineering Economics 2
An investment of $10,000 grows to $14,802 in 5 years with continuous compounding.
What is the nominal annual interest rate?