MEM Engineering Economics 4

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?

Accepted Answer

$−1,810

Answer

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?

Accepted Answer

Declining balance switching to straight-line over prescribed recovery periods

Answer

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?

Accepted Answer

Use the least common multiple of the service lives

Answer

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:

Accepted Answer

Higher net income and higher income taxes

Answer

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?

Accepted Answer

Combined ordering costs and inventory holding costs

Answer

EOQ finds the order quantity that minimizes the sum of annual ordering costs and annual inventory carrying (holding) costs.

MEM - Master of Engineering Management Practice Test

MEM - Master of Engineering Management Practice Test

MEM Engineering Economics 4