Economic Evaluation Techniques for Engineering Projects: A Comprehensive Guide

Question 1

Which of the following is a drawback of using the Net Present Value (NPV) method for project evaluation?

Accepted Answer

It does not account for the effects of inflation.

Answer

It takes into account the time value of money.

Answer

It provides a comprehensive assessment of a project's value.

Question 2

Which of the following statements accurately describes the internal rate of return (IRR) for a project?

Accepted Answer

IRR is the discount rate that equates the net present value (NPV) of a project to zero.

Answer

IRR is consistently higher than the payback period of a project.

Answer

IRR is synonymous with return on investment (ROI).

Question 3

Which of the following is NOT an advantage of employing economic evaluation techniques in engineering projects?

Accepted Answer

Eliminating the need for subjective judgment in project evaluation

Answer

Determining the most cost-efficient solution among alternatives

Answer

Enhancing project planning and decision-making processes

Answer

Minimizing the likelihood of project failure by identifying risks and uncertainties

Question 4

Which economic evaluation techniques consider the time value of money in their calculations?

Accepted Answer

Net present value (NPV)

Accepted Answer

Internal rate of return (IRR)

Answer

Payback period

Answer

Benefit-cost ratio (BCR)

Question 5

Which economic evaluation technique does not consider the time value of money?

Accepted Answer

Payback period

Answer

Net present value

Answer

Internal rate of return

Answer

Benefit-cost ratio

Question 6

The payback period of an investment is the amount of time required for the investment to:

Accepted Answer

Generate a cumulative net cash flow equal to the initial investment

Answer

Generate a positive net cash flow

Answer

Cover the operating costs

Answer

Reach its breakeven point

Question 7

Which of the following is NOT a limitation of the payback period method?

Accepted Answer

It is a simple and straightforward technique to apply

Answer

It ignores the time value of money

Answer

It does not consider the entire life cycle of the project

Answer

It can be misleading if cash flows are unevenly distributed

Question 8

The net present value (NPV) of an investment represents the:

Accepted Answer

Difference between the present value of all cash inflows and outflows

Answer

Sum of the present value of all future cash flows

Answer

Ratio of the present value of all cash inflows to outflows

Answer

Time it takes for the investment to generate a positive net cash flow

Question 9

In NPV calculations, the discount rate used is typically the:

Accepted Answer

Weighted average cost of capital (WACC)

Answer

Inflation rate

Answer

Bank's prime lending rate

Answer

Rate of return on a risk-free investment

Question 10

The payback period method measures the:

Accepted Answer

Time taken for the project to generate enough cash flow to cover its initial investment

Answer

Discount rate that makes the net present value of the project equal to zero

Answer

Ratio of the present value of the project's benefits to its costs

Answer

Percentage of the project's initial investment that is recovered each year

Question 11

The internal rate of return (IRR) is the discount rate at which the:

Accepted Answer

Net present value of the project is zero

Answer

Payback period of the project is minimized

Answer

Benefit-cost ratio of the project is maximized

Answer

Modified internal rate of return of the project is zero

Question 12

The benefit-cost ratio (BCR) compares the:

Accepted Answer

Present value of the project's benefits to its costs

Answer

Payback period of the project to its economic life

Answer

Internal rate of return of the project to the discount rate

Answer

Net present value of the project to its initial investment

Question 13

A project with a positive net present value is considered:

Accepted Answer

Economically viable

Answer

Economically unviable

Answer

Neither economically viable nor unviable

Answer

More information is needed to determine

Question 14

Which factor does NOT influence the internal rate of return (IRR) of a project?

Accepted Answer

Initial investment

Answer

Discount rate

Answer

Cash flow pattern

Answer

Project life

Question 15

For projects with different project lives, which economic evaluation technique is most suitable?

Accepted Answer

Net present value

Answer

Payback period

Answer

Internal rate of return

Answer

Benefit-cost ratio

Question 16

A project with an IRR of 16% is being considered. The company's minimum acceptable rate of return (MARR) is 12%. Should the project be accepted?

Accepted Answer

Yes, because the IRR is greater than the MARR.

Answer

No, because the IRR is less than the MARR.

Answer

Insufficient information to determine

Answer

No, because the payback period is longer than the project life

Question 17

The payback period of a project refers to:

Accepted Answer

The length of time it takes for the project to generate sufficient cash flow to cover its initial investment

Answer

The rate of return on the project

Answer

The net present value of the project

Answer

The internal rate of return of the project

Question 18

Which of the following factors is considered during economic evaluation but is not easily quantifiable?

Accepted Answer

Environmental impact

Answer

Project cost

Answer

Project benefits

Answer

Time value of money

Question 19

The minimum acceptable rate of return for a project is primarily determined by:

Accepted Answer

The cost of capital

Answer

The rate of inflation

Answer

The payback period

Answer

The internal rate of return

Question 20

The benefit-cost ratio of a project is the:

Accepted Answer

Ratio of the present value of the project's benefits to the present value of its costs

Answer

Difference between the present value of the project's benefits and the present value of its costs

Answer

Rate of return on the project

Answer

Payback period of the project

Question 21

A company is considering investing in new equipment costing £100,000. This equipment is expected to generate £25,000 in annual revenue for the next five years. What is the payback period for this investment?

Accepted Answer

4 years

Answer

10 years

Answer

5 years

Answer

2 years

Question 22

Which of the following is NOT a common method for discounting future cash flows in economic evaluation?

Accepted Answer

Simple Interest

Answer

Internal Rate of Return (IRR)

Answer

Present Value (PV)

Answer

Net Present Value (NPV)

Question 23

A project requires an initial investment of £50,000 and is expected to generate annual cash flows of £15,000 for five years. The discount rate is 10%. What is the Net Present Value (NPV) of this project?

Accepted Answer

Approximately £1,234

Answer

£75,000

Answer

Approximately -£1,234

Answer

£50,000

Question 24

A project has a discount rate of 12%. What is the present value of £100,000 received in three years?

Accepted Answer

Approximately £71,178

Answer

£100,000

Answer

Approximately £140,493

Question 25

A project requires an initial investment of £100,000 and generates annual cash flows of £30,000 for five years. What is the approximate Internal Rate of Return (IRR) of this project?

Accepted Answer

About 16%

Answer

About 25%

Answer

About 10%

Answer

About 5%

Question 26

Which economic evaluation technique considers the time value of money and provides a single figure representing a project's profitability?

Accepted Answer

Net Present Value (NPV)

Answer

Payback Period

Answer

Accounting Rate of Return

Answer

Simple Rate of Return

Question 27

A project has an initial investment of £200,000 and is expected to generate annual cash flows of £50,000 for six years. The discount rate is 8%. What is the profitability index (PI) of this project?

Accepted Answer

Approximately 1.12

Answer

1.00

Answer

Approximately 0.88

Question 28

Which of the following is NOT a factor that influences the choice of an economic evaluation technique?

Accepted Answer

Project manager's personal preference

Answer

Availability of data and information

Answer

Project risk and uncertainty

Answer

Project size and complexity

Question 29

A company is considering two mutually exclusive projects, Project A and Project B. Project A has a higher NPV, but Project B has a shorter payback period. Which project should the company choose?

Accepted Answer

The company should choose Project A, as it has a higher NPV.

Answer

The company should choose the project with the highest IRR.

Answer

The company should choose Project B, as it has a shorter payback period.

Question 30

Sensitivity analysis is used in economic evaluation to:

Accepted Answer

Assess the impact of changes in key variables on project profitability.

Answer

Determine the Internal Rate of Return (IRR) of a project.

Answer

Calculate the payback period of a project.