MEM Engineering Economics 4 — Questions and Answers
Question 1: A project has the following cash flows: Year 0: −$100,000; Year 1: $40,000; Year 2: $50,000; Year 3: $30,000. At a 10% MARR, what is the NPV?
- $−1,810 (Correct answer)
- $2,190
- $20,000
- $−5,320
Correct answer: $−1,810
NPV = −100,000 + 40,000/1.1 + 50,000/1.21 + 30,000/1.331 = −100,000 + 36,364 + 41,322 + 22,539 ≈ −$1,775 (approximately −$1,810).
Question 2: The modified accelerated cost recovery system (MACRS) in the United States uses which depreciation approach?
- Straight-line over the asset's physical life
- Declining balance switching to straight-line over prescribed recovery periods (Correct answer)
- Units-of-production based on actual usage
- Sum-of-years-digits over the IRS-assigned life
Correct answer: Declining balance switching to straight-line over prescribed recovery periods
MACRS uses declining balance (typically 200% or 150% DB) switching to straight-line when SL gives a larger deduction, over IRS-specified recovery periods.
Question 3: When comparing two alternatives with different useful lives using the present worth method, what technique should be applied?
- Select the alternative with the longer life for comparison
- Use the least common multiple of the service lives (Correct answer)
- Simply compare the PW over each alternative's own life
- Use the shorter life and ignore remaining service of the longer-life option
Correct answer: Use the least common multiple of the service lives
The least common multiple (LCM) period ensures both alternatives are compared over equal time horizons by assuming repeated identical cycles.
Question 4: A manufacturing firm uses FIFO inventory accounting during a period of rising prices. Compared to LIFO, FIFO will result in:
- Lower net income and lower income taxes
- Higher net income and higher income taxes (Correct answer)
- The same net income regardless of price changes
- Lower COGS and lower net income
Correct answer: Higher net income and higher income taxes
FIFO assigns older (lower-cost) inventory to COGS first, resulting in lower COGS, higher gross profit, higher net income, and higher taxes during inflation.
Question 5: What is the economic order quantity (EOQ) model designed to minimize?
- Total revenue from product sales
- Combined ordering costs and inventory holding costs (Correct answer)
- Lead time for procurement of materials
- The number of stockout events per year
Correct answer: Combined ordering costs and inventory holding costs
EOQ finds the order quantity that minimizes the sum of annual ordering costs and annual inventory carrying (holding) costs.
Question 6: A loan of $10,000 is to be repaid in equal annual payments over 5 years at 8% annual interest. What is the approximate annual payment?
- $2,000
- $2,505 (Correct answer)
- $2,246
- $1,800
Correct answer: $2,505
A = P × [i(1+i)^n] / [(1+i)^n − 1] = 10,000 × [0.08(1.08)^5] / [(1.08)^5 − 1] ≈ $2,505.
Question 7: In a replacement analysis, which term describes the cost that would be foregone by keeping the existing asset one more year?
- Total life-cycle cost
- Marginal cost of the defender (Correct answer)
- Sunk cost of the challenger
- Capital recovery cost
Correct answer: Marginal cost of the defender
The marginal cost of the defender is the cost of keeping the existing asset (defender) for one additional year, including foregone salvage value and operating costs.
MEM Engineering Economics 4
A project has the following cash flows: Year 0: −$100,000; Year 1: $40,000; Year 2: $50,000; Year 3: $30,000.
At a 10% MARR, what is the NPV?