EIT Engineering Economics 3

Question 1

A project has an initial cost of $80,000, annual benefits of $20,000, and a life of 6 years. At i = 10%, what is the benefit-cost ratio?

Accepted Answer

1.09

Answer

PV of benefits = 20,000·(P/A,10%,6) = 20,000·4.355 = $87,100; B/C = 87,100/80,000 ≈ 1.09.

Question 2

What is the effective annual interest rate if the nominal rate is 12% compounded monthly?

Accepted Answer

12.36%

Answer

EAR = (1 + 0.12/12)^12 − 1 = (1.01)^12 − 1 ≈ 12.68%.

Question 3

Which depreciation method produces the largest depreciation expense in the first year of an asset's life?

Accepted Answer

Double-declining-balance

Answer

Double-declining-balance applies twice the straight-line rate to book value, maximizing first-year depreciation.

Question 4

If a project's net present value is zero, the discount rate used equals:

Accepted Answer

The IRR

Answer

By definition, the IRR is the discount rate that makes NPV equal to zero.

Question 5

A company borrows $100,000 at 8% per year compounded quarterly. What is the effective annual rate?

Accepted Answer

8.24%

Answer

EAR = (1 + 0.08/4)^4 − 1 = (1.02)^4 − 1 ≈ 8.24%.

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