EIT Engineering Economics 5 — Questions and Answers
Question 1: A project requires an investment of $200,000 and yields uniform annual revenues. The simple payback period is 5 years. What are the annual revenues?
- $30,000
- $35,000
- $40,000 (Correct answer)
- $50,000
Correct answer: $40,000
Simple payback = Initial cost / Annual revenue; Annual revenue = 200,000/5 = $40,000.
Question 2: When using the annual worth (AW) method to compare alternatives with different lives, you should:
- Use the life of the shorter alternative
- Use the LCM of the lives
- Compare AW values directly since they are already annualized (Correct answer)
- Always convert to a 10-year study period
Correct answer: Compare AW values directly since they are already annualized
Annual worth is already expressed per year, so alternatives with different lives can be compared directly at their computed AW.
Question 3: A firm buys equipment for $60,000 with a 5-year MACRS life. The Year 3 MACRS rate is 19.2%. What is the Year 3 depreciation?
- $9,600
- $11,520 (Correct answer)
- $12,000
- $13,440
Correct answer: $11,520
Year 3 depreciation = 0.192 × $60,000 = $11,520.
Question 4: Which of the following is an example of an 'opportunity cost'?
- The cost of raw materials used in production
- The foregone return on invested capital used for a project (Correct answer)
- The depreciation expense on manufacturing equipment
- The fixed overhead allocated to a product
Correct answer: The foregone return on invested capital used for a project
Opportunity cost is the benefit foregone by choosing one alternative over the next-best alternative.
Question 5: A project produces after-tax cash flows of −$50,000 at t=0 and +$15,000 per year for 5 years. The NPV at MARR = 12% is approximately:
- −$4,071
- +$4,071 (Correct answer)
- $25,000
- +$54,071
Correct answer: +$4,071
NPV = −50,000 + 15,000·(P/A,12%,5) = −50,000 + 15,000·3.605 = −50,000 + 54,075 ≈ +$4,075.
Question 6: The economic service life of an asset is the age at which the:
- Cumulative depreciation equals salvage value
- Annual worth of costs is minimized (Correct answer)
- Asset reaches zero book value
- Payback period equals the asset life
Correct answer: Annual worth of costs is minimized
Economic service life is the number of years that minimizes the equivalent uniform annual cost (EUAC) of owning and operating the asset.
Question 7: In a sensitivity analysis, a project's NPV is most sensitive to which variable if a 10% change in that variable causes the largest NPV change?
- The variable with the highest absolute value
- The variable causing the greatest absolute change in NPV (Correct answer)
- The variable with the longest time horizon
- The variable with the lowest cost
Correct answer: The variable causing the greatest absolute change in NPV
Sensitivity is measured by the magnitude of NPV change resulting from a given percentage change in the input variable.
EIT Engineering Economics 5
A project requires an investment of $200,000 and yields uniform annual revenues.
The simple payback period is 5 years.
What are the annual revenues?