NCEES Engineering Economics 5

Question 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?

Accepted Answer

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

Answer

Machine Y — lower annual costs dominate

Answer

Machine X — lower first cost always wins

Answer

They are equivalent at i=10%

Question 2

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

Accepted Answer

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

Answer

The break-even point for two alternatives

Answer

The effective annual rate from a nominal rate

Answer

The depreciation life of an asset

Question 3

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

Accepted Answer

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

Answer

The current market value of an existing machine

Answer

Future maintenance costs of the existing equipment

Answer

The purchase price of a challenger machine

Question 4

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

Accepted Answer

12.551%

Answer

12.000%

Answer

12.360%

Answer

13.000%

Question 5

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

Accepted Answer

Variable costs, incremental fixed costs, and opportunity costs only

Answer

All overhead costs regardless of relevance

Answer

Historical fixed costs already incurred

Answer

Only direct material and labor costs

Question 6

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

Accepted Answer

It increases the effective annual rate

Answer

It decreases the effective annual rate

Answer

It has no effect on the effective annual rate

Answer

It only matters if the nominal rate exceeds 10%

Question 7

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

Accepted Answer

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

Answer

IRR cannot be calculated for government projects

Answer

BCR always gives a higher value than IRR

Answer

Government projects never have a meaningful IRR