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Engineering Economics Flashcards

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  1. A firm is considering two machines. Machine X costs $30,000 with annual costs of $8,000 and a 5-year life. Machine Y costs $50,000 with annual costs of $5,000 and a 5-year life. At i=10%, (P/A,10%,5)=3.7908. Which has the lower present cost?

    Answer: Machine X: $60,326 vs Machine Y: $68,954 — select Machine X

    X: 30,000+8,000(3.7908)=$60,326; Y: 50,000+5,000(3.7908)=$68,954; Machine X has the lower total present cost.

  2. The 'rule of 72' in engineering economics is used to estimate:

    Answer: The number of years to double an investment at a given interest rate

    The rule of 72 states that years to double ≈ 72 / interest rate %, providing a quick mental estimate.

  3. Which of the following is a sunk cost in an economic analysis?

    Answer: The $40,000 spent last year on a feasibility study for a project under consideration

    Sunk costs are past expenditures that cannot be recovered and should not affect future decisions.

  4. If the nominal interest rate is 12% compounded quarterly, the effective annual interest rate is:

    Answer: 12.551%

    EAR = (1 + 0.12/4)^4 − 1 = (1.03)^4 − 1 = 0.12551 = 12.551%.

  5. In a make-vs-buy decision, which costs should be included in the 'make' alternative?

    Answer: Variable costs, incremental fixed costs, and opportunity costs only

    Only incremental (avoidable) costs and opportunity costs are relevant; sunk fixed costs are excluded from make-vs-buy analysis.

  6. What effect does increasing the compounding frequency (e.g., from annually to continuously) have on the effective annual rate?

    Answer: It increases the effective annual rate

    More frequent compounding means interest earns interest sooner, so the effective annual rate rises toward the continuous limit e^r − 1.

  7. For public sector projects, the benefit-cost ratio is preferred over IRR because:

    Answer: It explicitly separates benefits and costs, making trade-offs transparent to stakeholders

    BCR presents benefits and costs separately, enabling public accountability and policy debate about the distribution of benefits versus costs.

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