EIT Engineering Economics 5

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?

Accepted Answer

$40,000

Answer

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:

Accepted Answer

Compare AW values directly since they are already annualized

Answer

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?

Accepted Answer

$11,520

Answer

Year 3 depreciation = 0.192 × $60,000 = $11,520.

Question 4

Which of the following is an example of an 'opportunity cost'?

Accepted Answer

The foregone return on invested capital used for a project

Answer

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:

Accepted Answer

+$4,071

Answer

NPV = −50,000 + 15,000·(P/A,12%,5) = −50,000 + 15,000·3.605 = −50,000 + 54,075 ≈ +$4,075.

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