Engineering Economic Analysis: Master the Fundamentals of Engineering Economics

Question 1

When conducting an engineering economic analysis, which ethical consideration should an engineer prioritize?

Accepted Answer

Considering the project's environmental and societal impacts

Answer

Focusing solely on the project's financial viability

Answer

Prioritizing personal financial gain over project objectives

Answer

Disregarding stakeholder input and perspectives

Question 2

How can engineers leverage engineering economic analysis to balance economic objectives with environmental and social considerations in decision-making, promoting sustainable development?

Accepted Answer

Engineers can use engineering economic analysis to evaluate the costs and benefits of sustainable technologies.

Answer

Engineering economic analysis can be used to justify environmentally harmful projects if they are economically viable.

Answer

Engineering economic analysis is irrelevant to sustainable development.

Question 3

In engineering economic analysis involving multiple stakeholders with potentially conflicting interests, which ethical consideration should engineers prioritize?

Accepted Answer

Disclosing potential conflicts of interest and mitigating any biases that may arise.

Answer

Prioritizing the financial interests of stakeholders who will benefit the most from the project.

Answer

Ignoring the ethical implications of the economic analysis as they fall outside the scope of engineering responsibilities.

Answer

Choosing the economic option that is most favorable to the environment, regardless of its impact on other stakeholders.

Question 4

Which decision-making criterion is most suitable for evaluating engineering projects with varying lifespans, and which is better for projects with equal lifespans? Explain your reasoning.

Accepted Answer

Equivalent annual cost (EAC) for varying lifespans, benefit-cost ratio (BCR) for equal lifespans

Answer

BCR for high initial costs, EAC for high ongoing costs

Answer

EAC for low-risk projects, BCR for high-risk projects

Answer

BCR for multiple benefits, EAC for single benefit

Question 5

How do environmental regulations affect the feasibility of engineering projects?

Accepted Answer

Increase project costs, potentially impacting feasibility

Answer

Do not influence the economic viability of projects

Answer

Simplify project evaluation by providing clear guidelines

Answer

Exclusively impact large-scale engineering projects

Question 6

Sensitivity analysis is a valuable tool in engineering economic analysis. What is a benefit of using sensitivity analysis?

Accepted Answer

It helps identify critical variables affecting the project's outcome

Answer

It reduces the uncertainty associated with future cash flows

Question 7

Which of the following decision-making criteria is **NOT** based on the present worth of the cash flows?

Accepted Answer

Payback period

Answer

Net present value

Answer

Internal rate of return

Answer

Profitability index

Question 8

Which of the following is an advantage of using a payback period to evaluate projects?

Accepted Answer

It is widely used and easy to understand

Answer

It considers the time value of money

Answer

It provides information about the project's profitability

Answer

It is a comprehensive measure of project performance

Question 9

Which decision-making criterion incorporates both the time value of money and the riskiness of a project?

Accepted Answer

Internal rate of return (IRR)

Answer

Payback period

Answer

Net present value (NPV)

Answer

Return on investment (ROI)

Question 10

Which of the following is not an advantage of using engineering economic analysis?

Accepted Answer

Eliminates uncertainties and risks associated with projects

Answer

Facilitates informed decision-making

Answer

Considers the time value of money

Answer

Provides a standardized framework for project evaluation

Question 11

Which of the following is the most appropriate method for comparing projects with different lifespans?

Accepted Answer

Equivalent annual worth

Answer

Net present value

Answer

Payback period

Answer

Return on investment

Question 12

The process of converting a series of cash flows occurring at different points in time into a single equivalent cash flow at a specific point in time is known as:

Accepted Answer

Discounting

Answer

Time value of money analysis

Answer

Cash flow analysis

Answer

Compounding

Question 13

The equivalent annual worth (EAW) of a project is:

Accepted Answer

The annual cash flow that has the same present worth as the project's initial investment.

Answer

The average annual cash flow over the project's lifetime.

Answer

The annual cash flow that has the same future worth as the project's initial investment.

Answer

The annual cash flow that is required to recover the project's initial investment.

Question 14

A company's cost of capital is the:

Accepted Answer

Weighted average cost of all sources of financing.

Answer

Minimum rate of return required by investors.

Answer

Average annual return on the company's assets.

Answer

Difference between the company's revenue and expenses.

Question 15

A project has the following cash flows: Year 0: -£100,000; Year 1: £20,000; Year 2: £30,000; Year 3: £40,000. If the discount rate is 10%, calculate the project's net present value (NPV).

Accepted Answer

£10,000

Answer

£20,000

Answer

£30,000

Answer

£40,000

Question 16

For projects with a predetermined lifespan, which decision-making criterion is most appropriate?

Accepted Answer

Net present value (NPV)

Answer

Internal rate of return (IRR)

Answer

Benefit-cost ratio (BCR)

Answer

Payback period

Question 17

Which of the following is NOT an advantage of using engineering economic analysis?

Accepted Answer

It is a complete substitute for intuition and judgment.

Answer

It helps identify profitable projects.

Answer

It minimizes the risk of poor investment decisions.

Question 18

What is the purpose of creating a cash flow diagram?

Accepted Answer

To depict the flow of cash over time

Answer

To determine the present value of an investment

Answer

To calculate the internal rate of return

Answer

To analyze the different investment options

Question 19

Which decision-making criterion is founded on the concept of maximizing the present value of an investment?

Accepted Answer

Net present value

Answer

Benefit-cost ratio

Answer

Equivalent annual cost

Answer

Internal rate of return

Question 20

Distinguish between an ordinary annuity and an annuity due. How do they differ in their cash flow timing?

Accepted Answer

An ordinary annuity has equal cash flows at the end of each period, while an annuity due has equal cash flows at the beginning of each period.

Answer

An annuity due has equal cash flows at the end of each period, while an ordinary annuity has equal cash flows at the beginning of each period.

Answer

An ordinary annuity has a higher present value than an annuity due.

Answer

An annuity due has a higher present value than an ordinary annuity.

Question 21

How does inflation affect the real value of money over time?

Accepted Answer

It depreciates the real value of money.

Answer

It appreciates the real value of money.

Answer

It has no impact on the real value of money.

Answer

Its effect on the real value of money varies based on the inflation rate.

Question 22

Define the internal rate of return (IRR) of an investment.

Accepted Answer

The discount rate that equates the net present value of an investment to zero.

Answer

The discount rate that equates the benefit-cost ratio of an investment to one.

Answer

The discount rate that equates the future value of an investment to its present value.

Answer

The discount rate that equates the equivalent annual cost of an investment to its annual cash flow.

Question 23

Distinguish between an investment and an expense. How are they fundamentally different?

Accepted Answer

An investment is anticipated to generate future cash flows, whereas an expense does not.

Answer

An expense is anticipated to generate future cash flows, whereas an investment does not.

Answer

An investment is typically a significant one-time payment, whereas an expense is a smaller, recurring payment.

Answer

An expense is typically a significant one-time payment, whereas an investment is a smaller, recurring payment.

Question 24

Which industry commonly utilizes engineering economic analysis?

Accepted Answer

Manufacturing

Answer

Healthcare

Answer

Retail

Answer

Education

Question 25

In a cash flow diagram, cash inflows are commonly depicted by:

Accepted Answer

Upward arrows

Answer

Downward arrows

Answer

Horizontal lines

Answer

Vertical lines

Question 26

Revised: When selecting an appropriate discount rate, which of the following is NOT a relevant factor to consider?

Accepted Answer

Tax laws

Answer

Inflation rate

Answer

Riskiness of the investment

Answer

Company's required rate of return

Question 27

In a mutually exclusive decision problem, which approach best compares alternative options?

Accepted Answer

Incremental analysis

Answer

Equivalent annual value analysis

Answer

Life cycle cost analysis

Answer

Sensitivity analysis

Question 28

How does inflation affect the accuracy of project evaluations in engineering economic analysis?

Accepted Answer

Inflation can distort the present value of future cash flows.

Answer

Inflation overestimates project costs and underestimates revenues.

Answer

Inflation has a negligible impact on project evaluations.

Answer

Inflation only affects projects with long-term cash flows.

Question 29

How do engineers typically account for uncertainty and risk in their economic decision-making?

Accepted Answer

Identify potential risks and uncertainties, quantify their impact, and develop strategies to reduce or transfer them.

Answer

Ignore uncertainty and risk because they are too difficult to quantify and incorporate.

Answer

Rely solely on intuition or 'gut feeling' to assess the potential impact of uncertainty and risk.

Question 30

Which of the following is NOT considered a type of cash flow?

Accepted Answer

Sunk cost

Answer

Capital investment

Answer

Expense

Answer

Revenue

Question 31

What is the formula used to calculate the present worth (PW) of a future cash flow?

Accepted Answer

PW = FV / (1 + r)^n

Answer

PW = FV * (1 + r)^n

Answer

PW = FV - r^n

Answer

PW = r/(FV + n)

Question 32

What is the primary purpose of performing a payback period analysis?

Accepted Answer

To determine the time required to recover the initial investment

Answer

To calculate the net present value of the project

Answer

To compare the profitability of multiple projects

Answer

To estimate the risk associated with an investment

Question 33

Which decision criterion considers both the present and future value of cash flows?

Accepted Answer

Net present value

Answer

Payback period

Answer

Equivalent annual cost

Answer

Benefit-cost ratio

Question 34

What is the key difference between sunk costs and avoidable costs?

Accepted Answer

Sunk costs are past costs, while avoidable costs are future costs

Answer

Sunk costs are future costs, while avoidable costs are past costs

Answer

Sunk costs are relevant to decision-making, while avoidable costs are not

Answer

Sunk costs depend on the project, while avoidable costs do not

Question 35

What is the primary purpose of a sensitivity analysis?

Accepted Answer

To assess how changes in input parameters affect the analysis results

Answer

To identify the most significant input parameters

Answer

To mitigate uncertainties associated with an investment

Answer

To enhance the precision of an analysis

Question 36

What is the definition of the breakeven point?

Accepted Answer

The level of production where the firm has zero profit

Answer

The level of production where the firm begins to make a profit

Answer

The level of production where the firm experiences losses

Answer

The level of production where the firm maximizes profit

Question 37

Which of the following is NOT a factor that affects the time value of money?

Accepted Answer

Political climate

Answer

Inflation

Answer

Interest rates

Answer

Risk

Question 38

In a project with a positive NPV of £500 and an IRR of 10%, what conclusion can be drawn?

Accepted Answer

The project is financially viable and should be accepted.

Answer

The project is not financially viable and should be rejected.

Answer

The project's viability is uncertain, requiring further analysis.

Answer

The information provided is insufficient to determine the project's viability.

Question 39

Which formula is used to calculate the future value of a single amount?

Accepted Answer

FV = PV * (1 + r)^n

Answer

PV = FV / (1 + r)^n

Answer

PV = FV * r * n

Answer

FV = PV / r * n

Question 40

Which statement about the internal rate of return (IRR) is correct?

Accepted Answer

The IRR is the discount rate that makes the NPV of a project zero.

Answer

The IRR is always greater than the payback period.

Answer

The IRR is independent of the investment horizon.

Answer

The IRR is always a positive number.

Question 41

What is the primary purpose of a feasibility study in engineering economics?

Accepted Answer

Determine project's economic viability

Answer

Identify and assess potential risks

Answer

Develop a detailed project plan

Answer

Secure funding for the project

Question 42

Which of the following does NOT influence the time value of money?

Accepted Answer

Personal preferences

Answer

Interest rates

Answer

Inflation

Answer

Risk aversion

Question 43

A cash flow diagram primarily illustrates:

Accepted Answer

The sequence and magnitude of cash flows over time

Answer

The nominal interest rate applicable to the cash flows

Answer

The real interest rate applicable to the cash flows

Answer

The equivalent annual cost of the project

Question 44

The equivalent annual cost of an asset is:

Accepted Answer

The annualised value of all future cash flows

Answer

The actual cost of purchasing the asset

Answer

The sum of all cash flows over the asset's life

Answer

The difference between the initial investment and the salvage value

Question 45

A project with an internal rate of return of 12% has a:

Accepted Answer

Positive net present value

Answer

Negative net present value

Answer

Zero net present value

Answer

Insufficient information to determine the net present value

Question 46

A project with a payback period of 4 years:

Accepted Answer

Recovers the initial investment within 4 years

Answer

Generates a positive return on investment within 4 years

Answer

Has a positive net present value

Answer

Is guaranteed to be more profitable than a project with a payback period of 6 years

Question 47

The salvage value of an asset refers to:

Accepted Answer

The estimated value of the asset at the end of its useful life

Answer

The initial cost of the asset

Answer

The present value of all future cash flows

Answer

Depreciation expense over the asset's useful life

Question 48

Which factor does NOT influence the time value of money?

Accepted Answer

Capital gains

Answer

Interest rates

Answer

Inflation

Answer

Risk

Question 49

Which factors influence the time value of money?

Accepted Answer

Interest rate, inflation, risk, and time period

Answer

Political stability, government regulations, and social norms

Answer

Market demand, product availability, and economic growth

Answer

Personal preferences, risk tolerance, and investment goals

Question 50

Which decision-making criterion considers the uniform annual cash flow over the project's life?

Accepted Answer

Annual Worth (Equivalent Annual Worth)

Answer

Benefit-Cost Ratio

Answer

Internal Rate of Return (IRR)

Answer

Net Present Value

Question 51

Which is a limitation of the payback period method?

Accepted Answer

Ignores the time value of money

Answer

Considers the entire project life

Answer

Easy to understand and apply

Answer

Provides a quick estimate of investment recovery

Question 52

Which is an advantage of using the Net Present Value (NPV) method?

Accepted Answer

Considers the time value of money

Answer

Provides a quick estimate of investment return

Answer

Ignores the initial investment

Answer

Easy to calculate and interpret

Question 53

A company plans to invest in a new machine that costs £10,000 and is expected to generate annual savings of £2,500 for 5 years. If the company's opportunity cost of capital is 6%, what is the equivalent annual worth of the investment?

Accepted Answer

£2,297

Answer

£2,500

Answer

£2,000

Answer

£1,500

Question 54

Which quantitative method is used to compare mutually exclusive projects?

Accepted Answer

Benefit-Cost Ratio

Answer

Payback Period

Answer

Return on Investment (ROI)

Answer

Net Income

Question 55

A company is evaluating an investment with an initial cost of £12,000 and expects annual cash flows of £3,000 for 6 years. If the company's desired rate of return is 7%, what is the project's Net Present Value (NPV)?

Accepted Answer

£2,328

Answer

£1,000

Answer

£4,000

Answer

£3,000

Question 56

Which of the following is NOT a factor typically considered when evaluating the economic feasibility of an engineering project?

Accepted Answer

Aesthetics

Answer

Rate of return

Answer

Initial investment

Answer

Environmental impact

Question 57

Which of the following is an advantage of using sensitivity analysis in engineering economic evaluation?

Accepted Answer

It identifies the critical variables that have the greatest impact on the project's outcome.

Answer

It eliminates the need for making assumptions about future events.

Answer

It ensures that the project will be successful.

Question 58

What is the purpose of conducting a cost-benefit analysis?

Accepted Answer

To compare the total benefits of a project to its total costs.

Answer

To calculate the internal rate of return (IRR) of a project.

Answer

To determine the payback period of a project.

Question 59

Explain the fundamental distinction between deterministic and probabilistic analysis in engineering economic evaluation.

Accepted Answer

Deterministic analysis assumes that all future events are known with certainty, while probabilistic analysis recognizes and incorporates uncertainty.

Answer

Deterministic analysis is more accurate than probabilistic analysis.

Answer

Probabilistic analysis requires specialized software and is always more complex than deterministic analysis.

Question 60

Which of the following is a benefit of sensitivity analysis in engineering economic analysis?

Accepted Answer

Identifies the critical variables that significantly affect project outcomes

Answer

Eliminates uncertainty in cash flow projections

Answer

Guarantees a successful project outcome

Question 61

What is the difference between nominal and effective interest rates?

Accepted Answer

Effective interest rate considers compounding

Answer

Nominal interest rate is used for annual compounding only

Answer

They are the same for all projects

Answer

Nominal interest rate is always higher than effective interest rate

Question 62

Which of the following is NOT a type of capital budgeting?

Accepted Answer

Operating budget

Answer

New project analysis

Answer

Replacement analysis

Answer

Expansion analysis

Question 63

What is the purpose of a feasibility study in engineering economic analysis?

Accepted Answer

Assess the technical, economic, and environmental viability of a project

Answer

Identify the best location for the project

Answer

Determine the exact cost of the project

Question 64

Which of the following is NOT a step in the engineering economic analysis process?

Accepted Answer

Develop a marketing plan

Answer

Identify alternatives

Answer

Estimate cash flows