Engineering Economics Flashcards

A $1,000 bond pays 8% annual interest and matures in 10 years. If the market interest rate is 10%, what is the bond's present value? (P/A,10%,10)=6.1446; (P/F,10%,10)=0.3855

Answer: $877.11

PV = 80(6.1446) + 1000(0.3855) = $491.57 + $385.50 = $877.07 ≈ $877.11.

The MACRS depreciation system is primarily used for:

Answer: Federal income tax purposes in the US

MACRS (Modified Accelerated Cost Recovery System) is mandated by the US tax code for federal income tax depreciation calculations.

What is the capitalized cost of a perpetual annual maintenance expense of $5,000 at an interest rate of 5%?

Answer: $100,000

Capitalized cost = A / i = $5,000 / 0.05 = $100,000.

In replacement analysis, the defender's opportunity cost is best defined as:

Answer: The current market value of the existing asset

The opportunity cost of keeping the defender is its current market value—the cash foregone by not selling it.

A project has the following cash flows: Year 0 = −$10,000; Year 1 = $4,000; Year 2 = $4,000; Year 3 = $5,000. What is the payback period?

Answer: 2.4 years

After Year 2, cumulative cash flow = $8,000; remaining $2,000 recovered in Year 3 at $5,000/year → 2 + 2,000/5,000 = 2.4 years.

When performing an incremental rate of return analysis on two alternatives, you select the higher-cost alternative when:

Answer: The incremental IRR exceeds the MARR

If the incremental investment earns a return (ΔIRR) above the MARR, the additional cost is justified and the higher-cost alternative is selected.

Inflation-adjusted (real) interest rate is approximately equal to:

Answer: Market rate minus inflation rate

Real interest rate ≈ Market (nominal) rate − Inflation rate (exact form: (1+i)/(1+f) − 1).