MEM Engineering Economics 3

Question 1

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?

Accepted Answer

$14,000

Answer

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

Question 2

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

Accepted Answer

Ignored when making current and future decisions

Answer

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

Question 3

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

Accepted Answer

12.68%

Answer

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

Question 4

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

Accepted Answer

$62,500

Answer

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

Question 5

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

Accepted Answer

Net present value

Answer

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

MEM - Master of Engineering Management Practice Test

MEM - Master of Engineering Management Practice Test

MEM Engineering Economics 3