EIT Engineering Economics 4 — Questions and Answers
Question 1: A firm's after-tax MARR is 12%. Its effective tax rate is 35%. What is the before-tax MARR?
- 15.5%
- 17.2%
- 18.5% (Correct answer)
- 19.0%
Correct answer: 18.5%
Before-tax MARR = After-tax MARR / (1 − tax rate) = 12% / (1 − 0.35) ≈ 18.5%.
Question 2: Which of the following best describes 'sunk cost' in engineering economics?
- Future cost that depends on the decision
- Past expenditure that cannot be recovered (Correct answer)
- Annual operating cost of a system
- Opportunity cost of an investment
Correct answer: Past expenditure that cannot be recovered
A sunk cost is a past expenditure that is irrelevant to future decision-making because it cannot be recovered.
Question 3: Two alternatives have the following annual costs: Alt A = $15,000/yr, Alt B = $12,000/yr with an incremental first cost of $20,000 over Alt A's life of 5 years at 10%. Should Alt B be selected?
- Yes, because its annual cost is lower
- Yes, if the PV of savings exceeds $20,000 (Correct answer)
- No, because Alt A has lower initial cost
- Yes, only if IRR of increment > MARR
Correct answer: Yes, if the PV of savings exceeds $20,000
PV of annual savings = 3,000·(P/A,10%,5) = 3,000·3.791 = $11,373 < $20,000, so Alt B is NOT preferred — select Alt A.
Question 4: What is the present value of $5,000 received at the end of each year for 8 years at 6% interest?
- $27,943
- $30,541
- $31,047 (Correct answer)
- $40,000
Correct answer: $31,047
PV = 5,000·(P/A,6%,8) = 5,000·6.210 = $31,050 ≈ $31,047.
Question 5: In a replacement analysis, the 'defender' is:
- The new asset being considered
- The currently owned asset (Correct answer)
- The asset with the lowest AW cost
- The asset with the longest remaining life
Correct answer: The currently owned asset
The defender is the existing asset under consideration for replacement; the challenger is the new alternative.
Question 6: A geometric gradient series has a first-year payment of $1,000 growing at 5% per year for 10 years. At i = 8%, the present value is approximately:
- $7,246
- $8,108 (Correct answer)
- $9,021
- $10,000
Correct answer: $8,108
PV = A₁·[1−(1+g)^n·(1+i)^(-n)]/(i−g) = 1000·[1−(1.05/1.08)^10]/0.03 ≈ $8,108.
Question 7: If inflation is 4% and the market interest rate is 9%, the real interest rate is approximately:
- 4.00%
- 4.81% (Correct answer)
- 5.00%
- 13.00%
Correct answer: 4.81%
Real rate = (1 + market)/(1 + inflation) − 1 = (1.09/1.04) − 1 ≈ 4.81%.
EIT Engineering Economics 4
A firm's after-tax MARR is 12%.
Its effective tax rate is 35%.
What is the before-tax MARR?