Fundamentals of Engineering Engineering Economics 1 — Questions and Answers
Question 1: What is the formula for the Future Worth (F) of a present sum (P) after n periods at interest rate i?
- F = P(1 + i)ⁿ (Correct answer)
- F = P/(1 + i)ⁿ
- F = P·n·i
- F = P + n·i
Correct answer: F = P(1 + i)ⁿ
The future worth formula F = P(1 + i)ⁿ compounds the present sum at rate i over n periods.
Question 2: What is the breakeven point in engineering economics?
- The output level where total revenue equals total cost (Correct answer)
- The output level where profit is maximized
- The minimum production quantity
- The output where fixed costs are recovered
Correct answer: The output level where total revenue equals total cost
The breakeven point is where total revenue equals total cost, resulting in neither profit nor loss.
Question 3: Which depreciation method gives the highest depreciation expense in the early years of an asset's life?
- Double declining balance (DDB) (Correct answer)
- Straight-line method
- Sum-of-years-digits (SYD)
- Units of production
Correct answer: Double declining balance (DDB)
The double declining balance method applies twice the straight-line rate to the book value, giving the highest early depreciation.
Question 4: Net Present Value (NPV) of a project is positive. What does this indicate?
- The project returns more than the minimum attractive rate of return (MARR) (Correct answer)
- The project breaks even
- The internal rate of return equals the MARR
- The payback period is zero
Correct answer: The project returns more than the minimum attractive rate of return (MARR)
A positive NPV means the present value of cash inflows exceeds outflows, indicating returns exceed the MARR.
Question 5: What does MARR stand for in engineering economics?
- Minimum Attractive Rate of Return (Correct answer)
- Maximum Allowable Rate of Return
- Mean Annual Rate of Return
- Minimum Acceptable Revenue Ratio
Correct answer: Minimum Attractive Rate of Return
MARR (Minimum Attractive Rate of Return) is the minimum return a project must earn to be considered acceptable.
Question 6: Which method of economic comparison finds the interest rate that makes NPV = 0?
- Internal Rate of Return (IRR) (Correct answer)
- Net Present Value (NPV)
- Benefit-Cost Ratio
- Annual Worth method
Correct answer: Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is the discount rate that makes the net present value of all cash flows equal to zero.
Fundamentals of Engineering Engineering Economics 1
What is the formula for the Future Worth (F) of a present sum (P) after n periods at interest rate i?