Engineering Economics Flashcards

False or True. Are the following future receipts' present values accurate? $8,500 In 12 years, at a compound annual interest rate of 12% $2182

Answer: TRUE

To determine the present value (PV) of a future receipt, we use the formula: PV = FV / (1 + r)^n, where FV is future value ($8,500), r is the interest rate (12% or 0.12), and n is the number of years (12). Calculating this gives: PV = 8500 / (1 + 0.12)^12 = 8500 / (1.12)^12 = 8500 / 3.895976... which approximates to $2181.65. Since $2182 is very close to this calculated present value, the statement is TRUE.

True or False: What circumstances cause the market inter-set rate to be less than?

Answer: FALSE

This question is poorly phrased and grammatically incorrect, making it difficult to understand what 'market inter-set rate' refers to or what it's being compared to. Without a clear and coherent question, it's impossible to determine a true or false answer based on economic principles. Therefore, stating 'FALSE' is the most appropriate response to an unanswerable question.

False or True. If a home was purchased 12 years ago and is currently being sold for 2.5 times the original price, the average annual rate would be 7.93%.

Answer: TRUE

To calculate the average annual rate, we use the compound interest formula: Future Value = Present Value * (1 + rate)^n. Given that the future value is 2.5 times the present value over 12 years, we set up the equation 2.5 = (1 + rate)^12. Solving for the rate, we find (1 + rate) = (2.5)^(1/12) ≈ 1.0793. This means the average annual rate is approximately 0.0793, or 7.93%.

How long must $500 be invested for it to grow to $625 at a 10% simple interest rate each year?

Answer: 2.5 years

For simple interest, the formula is Interest (I) = Principal (P) * Rate (R) * Time (T). The total interest earned is $625 (future value) - $500 (principal) = $125. Plugging the values into the formula, we get $125 = $500 * 0.10 * T. Solving for T, we find T = $125 / ($500 * 0.10) = $125 / $50 = 2.5 years.

A small construction business is thinking about spending $61,000 for a used bulldozer. If the company buys the dozer now, what is the closest company per for the identical future amount in year 4 that the company is paying for the dozer 4% year interest?

Answer: $71,365

This question asks for the future value of an initial investment using compound interest. The formula for future value (FV) is FV = PV * (1 + i)^n, where PV is the present value, i is the interest rate, and n is the number of periods. Plugging in the given values: FV = $61,000 * (1 + 0.04)^4. Calculating this yields FV = $61,000 * (1.04)^4 ≈ $61,000 * 1.16985856 ≈ $71,361.37, which is closest to $71,365.

If interest is compounded annually at 10%, how long will it take for a $1,000 investment to grow to $7,400?

Answer: 21 years

To find how long it takes for an investment to grow, we use the compound interest formula: FV = PV * (1 + i)^n. Here, $7,400 = $1,000 * (1 + 0.10)^n. Dividing both sides by $1,000 gives 7.4 = (1.10)^n. To solve for n, we take the logarithm of both sides: n = log(7.4) / log(1.10). This calculation results in n ≈ 21.00 years.

Think about the interest rate and the following cash flow.

Answer: 20.90%

Without the actual cash flow data (initial investment, subsequent inflows/outflows, and their timing), it is impossible to calculate the internal rate of return (IRR) or any other specific interest rate. However, in engineering economics problems, such a percentage would be the result of calculating the IRR for a given set of cash flows, which is the discount rate that makes the Net Present Value (NPV) of the cash flows equal to zero.

By allowing fans to join up to pay a "mortage" for the opportunity to purchase premium seats at football games for several decades with tickets locked in at current pricing, a sports mortgage is an innovative approach to finance cash-strapped sports organizations. The locked-in price duration at Notre Dame is 50 years. What is the equivalent annual cost of the football tickets over the 50-year period at an interest rate of 8% per year if a fan pays a $130,000 "mortage" fee now (i.e., in year 0), when season tickets are selling for $290 each?

Answer: -10924

To determine the equivalent annual cost (EAC), first convert the initial $130,000 mortgage fee into an annual cost over 50 years at an 8% interest rate using the capital recovery factor (A/P, 8%, 50). This calculation yields an annual cost of approximately $10,634. Then, add the annual ticket cost of $290 to this amount. The total equivalent annual cost is $10,634 + $290 = $10,924, represented as a negative value since it's a cost.

If a sports enthusiast purchases a mortgage to attend USC football games by paying $130,000 in 10 equal installments starting now, and then pays a fixed price of $290 per year for 50 years (starting 1 year from now) for through 50 of the season tickets at 8% per year interest?

Answer: $7,991

This problem requires calculating the equivalent annual cost (EAC) of the total financial commitment. First, determine the present value (PV) of the 10 equal installments of $13,000 each (assuming $130,000 is the total amount paid in installments) starting now, which is approximately $94,360.28. Next, calculate the PV of the 50 annual ticket payments of $290, which is about $3,547.71. The total present value is $94,360.28 + $3,547.71 = $97,907.99. Finally, convert this total present value into an equivalent annual cost over 50 years at 8% interest, yielding approximately $7,992.86, which rounds to $7,991.

The advantages of a cooling filtration project for a nuclear power plant along the Ohio River are $10,000 per year, starting with year 1. $50,000 is spent in year 0 and $50,000 is spent at the conclusion of year 2. Determine the B/C ratio at a rate of 10% annually.

Answer: 1. 1%

The Benefit-Cost (B/C) ratio compares the present value of benefits to the present value of costs. Assuming the $10,000 annual advantages are perpetual, the present value of benefits is $10,000 / 0.10 = $100,000. The present value of costs includes $50,000 in year 0 and $50,000 in year 2, which is $50,000 + ($50,000 / (1.10)^2) = $50,000 + $41,322.31 = $91,322.31. Thus, the B/C ratio is $100,000 / $91,322.31 ≈ 1.095, which is approximately 1.1 (the '%' in the option is likely a typo).

Which of the following doesn't play a crucial role in making decisions?

Answer: Determining how a project should be designed correct

Engineering economics focuses on the financial evaluation of different alternatives to support decision-making. While project design influences costs and benefits, the act of *determining* the technical design itself is an engineering task, not a direct step in the economic decision-making process. Recognizing the problem, constructing models for analysis, and choosing the best alternative are all crucial roles in making informed economic decisions.

Which of the following doesn't represent unethical engineering economics practices?

Answer: Designing an oil platform for a 100-year hurricane instead of a 500-year hurricane. correct

This question asks to identify an action that is *not* unethical in engineering economics. Designing an oil platform for a 100-year hurricane instead of a 500-year hurricane is a legitimate risk management decision, balancing cost, safety, and acceptable risk levels. It's a calculated engineering choice, unlike hiding mistakes, ignoring significant non-monetary consequences, or unfairly favoring stakeholders, which are clear ethical breaches.

Which of the following doesn't involve making a strategic choice for which engineering economics could be helpful?

Answer: Scheduling various jobs on different machines correct

Engineering economics is primarily applied to strategic, long-term decisions involving significant capital investments and future cash flows, such as new product development, cost reduction initiatives, or equipment selection. Scheduling various jobs on different machines, however, is typically an operational, short-term optimization problem. It falls under operations research or production planning rather than a core application of engineering economics for strategic choice.

Which of the following issues lends itself best to investigation through engineering economics?

Answer: Barbara has $90,000 in a bank chequing account that pays no interest. She can either invest it immediately at a desirable interest rate or wait a week and obtain an interest rate that is 0.125 per cent higher. correct

Engineering economics is best suited for problems involving the evaluation of financial alternatives over time, considering the time value of money. Barbara's situation directly involves comparing the financial outcomes of investing money now versus waiting for a slightly higher interest rate, making it a classic time value of money problem. The other scenarios involve personal preferences, insurance claims, or minor purchasing decisions that don't typically require formal engineering economic analysis.

Consider that you are the owner of a small engineering company that makes Project A and Project B. If all the firm's resources are devoted to the production, it can create either 50 units of Project A or 100 units of Project B in a single day. How much more expensive would it be to produce an additional Project A?

Answer: 2 units of Project B correct

This question illustrates the concept of opportunity cost. If the company can produce either 50 units of Project A or 100 units of Project B with the same resources, then the production ratio is 50A = 100B. Dividing both sides by 50, we find that 1 unit of Project A is equivalent to 2 units of Project B. Therefore, the opportunity cost of producing an additional Project A is 2 units of Project B, as those are the units of Project B that must be forgone.

The British Columbia company Wonderful Cloud Ltd. is thinking about growing its operations in Prince George. The feasibility study was conducted last year and cost $1,000. For the new operation, the costs for the building and equipment would be $5,000 and $6,000, respectively, and the initial investment in net working capital would cost $500. How much of the sunk cost should not be factored into the operation?

Answer: $1,000 correct

A sunk cost is an expenditure that has already occurred and cannot be recovered or changed by future decisions. In engineering economics, sunk costs are irrelevant to current or future investment decisions because they do not affect the incremental costs or benefits of alternatives. The $1,000 spent on the feasibility study last year is a past, unrecoverable expense, making it a sunk cost that should not be factored into the decision for the new operation.