Engineering Economics Flashcards

A machine costs $80,000 and has a useful life of 5 years with a salvage value of $10,000. Using straight-line depreciation, what is the annual depreciation charge?

Answer: $14,000

SL depreciation = (Cost − Salvage) / Life = ($80,000 − $10,000) / 5 = $14,000 per year.

The concept of 'sunk cost' in engineering economics means that past expenditures should be:

Answer: Ignored when making current and future decisions

Sunk costs are unrecoverable past expenditures that are irrelevant to future decision-making because they cannot be changed.

If the nominal interest rate is 12% compounded monthly, what is the effective annual interest rate?

Answer: 12.68%

EAR = (1 + 0.12/12)^12 − 1 = (1.01)^12 − 1 ≈ 0.1268 or 12.68%.

A perpetuity pays $5,000 per year indefinitely. If the discount rate is 8%, what is the present value of the perpetuity?

Answer: $62,500

PV of perpetuity = Annual payment / Discount rate = $5,000 / 0.08 = $62,500.

Which capital budgeting method explicitly accounts for the time value of money AND provides a dollar measure of value added to the firm?

Answer: Net present value

NPV discounts all cash flows to the present and expresses value creation in dollars, making it the most theoretically sound capital budgeting method.

An asset purchased for $50,000 is sold after 4 years for $35,000. If accumulated depreciation at that time was $20,000, what is the book value gain or loss on disposal?

Answer: $5,000 gain

Book value at disposal = $50,000 − $20,000 = $30,000; Sale price $35,000 − Book value $30,000 = $5,000 gain.

In the context of engineering economics, what is 'opportunity cost'?

Answer: The foregone return from the best alternative use of resources

Opportunity cost is the value of the best alternative foregone when resources are committed to a particular project or decision.