NCEES Engineering Economics 3 — Questions and Answers
Question 1: 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
- $877.11 (Correct answer)
- $1,000.00
- $920.54
- $800.00
Correct answer: $877.11
PV = 80(6.1446) + 1000(0.3855) = $491.57 + $385.50 = $877.07 ≈ $877.11.
Question 2: The MACRS depreciation system is primarily used for:
- Federal income tax purposes in the US (Correct answer)
- Financial reporting to shareholders
- Replacement analysis only
- International projects under IFRS
Correct 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.
Question 3: What is the capitalized cost of a perpetual annual maintenance expense of $5,000 at an interest rate of 5%?
- $100,000 (Correct answer)
- $50,000
- $25,000
- $250,000
Correct answer: $100,000
Capitalized cost = A / i = $5,000 / 0.05 = $100,000.
Question 4: In replacement analysis, the defender's opportunity cost is best defined as:
- The current market value of the existing asset (Correct answer)
- The original purchase price of the existing asset
- The remaining book value of the existing asset
- The cost of the best available challenger
Correct 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.
Question 5: 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?
- 2.4 years (Correct answer)
- 2.0 years
- 3.0 years
- 1.5 years
Correct 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.
Question 6: When performing an incremental rate of return analysis on two alternatives, you select the higher-cost alternative when:
- The incremental IRR exceeds the MARR (Correct answer)
- The incremental IRR is less than the MARR
- The higher-cost alternative has the higher total IRR
- The net present worth of the increment is negative
Correct 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.
Question 7: Inflation-adjusted (real) interest rate is approximately equal to:
- Market rate minus inflation rate (Correct answer)
- Market rate plus inflation rate
- Market rate divided by inflation rate
- Inflation rate minus market rate
Correct answer: Market rate minus inflation rate
Real interest rate ≈ Market (nominal) rate − Inflation rate (exact form: (1+i)/(1+f) − 1).
NCEES Engineering Economics 3
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