MEM Engineering Economics 2

Question 1

A company is evaluating two mutually exclusive projects. Project A has an IRR of 18% and Project B has an IRR of 22%. The MARR is 15%. Which statement is most appropriate?

Accepted Answer

Use incremental IRR analysis to determine the preferred project

Answer

For mutually exclusive projects, incremental IRR analysis is required because the higher-IRR project is not necessarily the one that maximizes value.

Question 2

A bond with a face value of $1,000, a coupon rate of 6%, and 10 years to maturity is currently priced at $950. What is the approximate current yield?

Accepted Answer

6.3%

Answer

Current yield = Annual coupon / Current price = $60 / $950 ≈ 6.32%.

Question 3

Which depreciation method results in the highest tax benefit in the early years of an asset's life?

Accepted Answer

Double-declining balance depreciation

Answer

Double-declining balance is an accelerated method that applies twice the straight-line rate to the book value, producing the largest deductions in early years.

Question 4

A project requires an initial investment of $500,000 and is expected to generate annual after-tax cash flows of $90,000 for 8 years with no salvage value. What is the payback period?

Accepted Answer

5.6 years

Answer

Payback period = Initial investment / Annual cash flow = $500,000 / $90,000 ≈ 5.56 years.

Question 5

In a benefit-cost analysis for a public infrastructure project, which item is correctly classified as a disbenefit?

Accepted Answer

Reduced property values for residents near a new highway

Answer

Disbenefits are negative consequences borne by the public (users or third parties), not the sponsoring agency, such as noise or reduced property values.

MEM - Master of Engineering Management Practice Test

MEM - Master of Engineering Management Practice Test

MEM Engineering Economics 2