Practice Test GeeksMEM - Master of Engineering Management Practice Test
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Engineering Economics Flashcards

7 cards from real MEM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. The modified benefit-cost ratio (BCR) differs from the conventional BCR in that it:

    Answer: Subtracts disbenefits from the numerator rather than adding them to the denominator

    The modified BCR places disbenefits in the numerator (subtracted from benefits) rather than the denominator (added to costs), which can produce a different ratio value.

  2. A real option in capital budgeting gives a firm the right, but not the obligation, to take a future business action. Which of the following is an example of an 'option to abandon'?

    Answer: Shutting down a project and selling assets if market conditions deteriorate

    The option to abandon allows management to discontinue a project and recover salvage value if the project performs poorly, limiting downside risk.

  3. Which of the following correctly describes the relationship between risk and required return for engineering projects?

    Answer: Higher-risk projects require a higher MARR to compensate investors

    Investors require a risk premium for bearing uncertainty; therefore, riskier projects must earn a higher rate of return (higher MARR) to be acceptable.

  4. A $200,000 piece of equipment is classified as 5-year MACRS property. Using the MACRS half-year convention, the first-year depreciation rate is 20%. What is the depreciation deduction in year 1?

    Answer: $40,000

    Year 1 MACRS deduction = $200,000 × 20% = $40,000, applying the prescribed IRS first-year percentage for 5-year property.

  5. Which of the following best describes 'working capital' in the context of an engineering project's cash flow analysis?

    Answer: Funds tied up in inventory, receivables, and other current assets minus current liabilities

    Working capital is the net current assets (current assets minus current liabilities) required to support day-to-day operations, treated as a cash outflow at project start and recovered at project end.

  6. A project's after-tax cash flow can be approximated as ATCF = BTCF − taxes. If BTCF = $100,000, depreciation = $20,000, and the tax rate is 30%, what is the ATCF?

    Answer: $76,000

    Taxable income = BTCF − depreciation = $80,000; taxes = $80,000 × 0.30 = $24,000; ATCF = $100,000 − $24,000 = $76,000.

  7. The weighted average cost of capital (WACC) is used in engineering economics as the MARR when:

    Answer: A project uses a mix of debt and equity financing in proportions typical of the firm

    WACC reflects the blended cost of all capital sources weighted by their proportion in the firm's capital structure, making it the appropriate MARR for projects funded with the firm's typical financing mix.