EIT Engineering Economics 2

Question 1

An investment of $10,000 grows to $14,802 in 5 years with continuous compounding. What is the nominal annual interest rate?

Accepted Answer

7.0%

Answer

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?

Accepted Answer

$6,250

Answer

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?

Accepted Answer

$4,500

Answer

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?

Accepted Answer

The one with the higher NPV at MARR

Answer

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?

Accepted Answer

The annual payment to repay a present loan

Answer

The capital recovery factor converts a present amount P into an equivalent uniform annual series A.

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