NCEES Engineering Economics 2 — Questions and Answers
Question 1: A machine costs $50,000 and has a salvage value of $5,000 after 10 years. Using straight-line depreciation, what is the annual depreciation charge?
- $4,500 (Correct answer)
- $5,000
- $4,000
- $5,500
Correct answer: $4,500
Straight-line depreciation = (Cost − Salvage) / Life = ($50,000 − $5,000) / 10 = $4,500/year.
Question 2: What is the benefit-cost ratio of a project with a present worth of benefits of $120,000 and a present worth of costs of $80,000?
- 1.50 (Correct answer)
- 0.67
- 1.25
- 1.33
Correct answer: 1.50
BCR = PW(Benefits) / PW(Costs) = $120,000 / $80,000 = 1.50.
Question 3: An investment has cash flows of $10,000/year for 5 years. At i = 8%, what is the present worth using the uniform series present worth factor (P/A, 8%, 5) = 3.9927?
- $39,927 (Correct answer)
- $42,000
- $37,500
- $50,000
Correct answer: $39,927
PW = A × (P/A, i, n) = $10,000 × 3.9927 = $39,927.
Question 4: Which depreciation method results in the largest depreciation deduction in the first year for most assets?
- Double declining balance (Correct answer)
- Straight-line
- Sum-of-years digits
- Units of production
Correct answer: Double declining balance
Double declining balance applies twice the straight-line rate to the book value, producing the largest first-year deduction.
Question 5: A company borrows $100,000 at 6% annual interest compounded monthly. What is the effective annual interest rate?
- 6.168% (Correct answer)
- 6.000%
- 6.090%
- 6.250%
Correct answer: 6.168%
EAR = (1 + 0.06/12)^12 − 1 = (1.005)^12 − 1 ≈ 6.168%.
Question 6: If a project has a net present value of zero, which of the following is true?
- The project's IRR equals the MARR (Correct answer)
- The project should be rejected
- The project earns no profit
- The benefit-cost ratio is less than 1
Correct answer: The project's IRR equals the MARR
NPV = 0 means the project's return exactly equals the discount rate (MARR), making IRR = MARR.
Question 7: Two mutually exclusive alternatives are compared using present worth analysis. Alternative A has PW = $15,000 and Alternative B has PW = $22,000. What is the correct decision?
- Select Alternative B (Correct answer)
- Select Alternative A
- Select neither; neither is profitable
- Select the alternative with the lower first cost
Correct answer: Select Alternative B
In present worth analysis, select the alternative with the highest positive net present worth, which is Alternative B.
NCEES Engineering Economics 2
A machine costs $50,000 and has a salvage value of $5,000 after 10 years.
Using straight-line depreciation, what is the annual depreciation charge?