Fundamentals of Engineering Engineering Economics 2 — Questions and Answers
Question 1: In straight-line depreciation, what is the annual depreciation for an asset costing $50,000 with a salvage value of $5,000 and useful life of 5 years?
- $9,000 (Correct answer)
- $10,000
- $8,000
- $45,000
Correct answer: $9,000
Annual depreciation = (Cost - Salvage) / Life = ($50,000 - $5,000) / 5 = $9,000.
Question 2: What is the uniform series present worth factor (P/A, i%, n)?
- [(1+i)ⁿ - 1] / [i(1+i)ⁿ] (Correct answer)
- [i(1+i)ⁿ] / [(1+i)ⁿ - 1]
- [(1+i)ⁿ - 1] / i
- 1 / (1+i)ⁿ
Correct answer: [(1+i)ⁿ - 1] / [i(1+i)ⁿ]
The P/A factor converts a uniform series of payments A to present worth P: P = A × [(1+i)ⁿ - 1] / [i(1+i)ⁿ].
Question 3: A benefit-cost (B/C) ratio greater than 1.0 for a public project indicates:
- Benefits exceed costs and the project is economically justified (Correct answer)
- The project is too expensive
- Costs exceed benefits
- The project has no economic value
Correct answer: Benefits exceed costs and the project is economically justified
A B/C ratio > 1.0 means the present worth of benefits exceeds costs, justifying the public expenditure.
Question 4: What is the payback period for a project with an initial cost of $100,000 and uniform annual net cash flow of $25,000?
- 4 years (Correct answer)
- 5 years
- 3 years
- 2.5 years
Correct answer: 4 years
Payback period = Initial cost / Annual cash flow = $100,000 / $25,000 = 4 years.
Question 5: Which cost does NOT change with the level of production or output?
- Fixed cost (Correct answer)
- Variable cost
- Marginal cost
- Average cost
Correct answer: Fixed cost
Fixed costs remain constant regardless of production level, unlike variable costs which change with output.
Question 6: If the inflation rate is 4% and the market interest rate is 9%, what is the approximate real interest rate?
- ~4.8% (Correct answer)
- ~13%
- ~5%
- ~2.25%
Correct answer: ~4.8%
Using the Fisher equation: real rate = (1.09/1.04) - 1 ≈ 0.048 or 4.8%.
Fundamentals of Engineering Engineering Economics 2
In straight-line depreciation, what is the annual depreciation for an asset costing $50,000 with a salvage value of $5,000 and useful life of 5 years?