MEM Engineering Economics 5

Question 1

The modified benefit-cost ratio (BCR) differs from the conventional BCR in that it:

Accepted Answer

Subtracts disbenefits from the numerator rather than adding them to the denominator

Answer

The modified BCR places disbenefits in the numerator (subtracted from benefits) rather than the denominator (added to costs), which can produce a different ratio value.

Question 2

A real option in capital budgeting gives a firm the right, but not the obligation, to take a future business action. Which of the following is an example of an 'option to abandon'?

Accepted Answer

Shutting down a project and selling assets if market conditions deteriorate

Answer

The option to abandon allows management to discontinue a project and recover salvage value if the project performs poorly, limiting downside risk.

Question 3

Which of the following correctly describes the relationship between risk and required return for engineering projects?

Accepted Answer

Higher-risk projects require a higher MARR to compensate investors

Answer

Investors require a risk premium for bearing uncertainty; therefore, riskier projects must earn a higher rate of return (higher MARR) to be acceptable.

Question 4

A $200,000 piece of equipment is classified as 5-year MACRS property. Using the MACRS half-year convention, the first-year depreciation rate is 20%. What is the depreciation deduction in year 1?

Accepted Answer

$40,000

Answer

Year 1 MACRS deduction = $200,000 × 20% = $40,000, applying the prescribed IRS first-year percentage for 5-year property.

Question 5

Which of the following best describes 'working capital' in the context of an engineering project's cash flow analysis?

Accepted Answer

Funds tied up in inventory, receivables, and other current assets minus current liabilities

Answer

Working capital is the net current assets (current assets minus current liabilities) required to support day-to-day operations, treated as a cash outflow at project start and recovered at project end.

MEM - Master of Engineering Management Practice Test

MEM - Master of Engineering Management Practice Test

MEM Engineering Economics 5