Interest and Equivalence: Master Time Value of Money in Engineering Economics

Question 1

How does the effective interest rate differ from the nominal interest rate?

Accepted Answer

The difference depends on the compounding frequency.

Answer

The nominal rate is always higher than the effective rate.

Answer

The effective rate is always higher than the nominal rate.

Answer

There is no difference between the two rates.

Question 2

What is a limitation of using equivalence techniques in engineering economic analysis?

Accepted Answer

They can be complex to apply for complex cash flows.

Answer

They do not consider the time value of money.

Answer

They are only applicable to simple cash flows.

Answer

They are not applicable to engineering economic analysis.

Question 3

What is the purpose of the capital recovery factor in engineering economic analysis?

Accepted Answer

To convert an initial investment to an equivalent annual payment.

Answer

To convert an annual payment to an equivalent initial investment.

Answer

To convert a present value to a future value.

Answer

To convert a future value to a present value.

Question 4

What concept is referred to when we say that money has varying value at different times?

Accepted Answer

Time value of money

Answer

Amount of interest earned over time

Answer

Purchasing power of money

Answer

Value of money relative to goods and services

Question 5

Which factor is irrelevant when considering investment decisions?

Accepted Answer

Personal preferences

Answer

Interest rates

Answer

Inflation

Answer

Risk

Question 6

The internal rate of return (IRR) of a project is:

Accepted Answer

The interest rate where the present value of project benefits equals the present value of its costs

Answer

The average annual return on the project

Answer

The projected rate of return on the project

Answer

The minimum acceptable rate of return for the project

Question 7

An investment has a positive net present value (NPV). This means that:

Accepted Answer

The investment is expected to generate more value than it costs.

Answer

The investment is expected to generate less value than it costs.

Answer

The investment is expected to break even.

Answer

The investment is expected to have a negative payback period.

Question 8

How does sensitivity analysis contribute to assessing the reliability of engineering economic decisions?

Accepted Answer

By evaluating the impact of input value variations on the decision outcome

Answer

By determining the relative importance of input variables in the analysis

Answer

By optimizing input values to maximize the decision outcome

Answer

By reducing the uncertainties associated with input values

Question 9

A project requires an initial investment of £100,000 and will generate annual cash flows of £20,000 for ten years. The annual interest rate is 5%. What is the equivalent annual cost of the project?

Accepted Answer

£12,462

Answer

£15,000

Answer

£13,500

Answer

£11,000

Question 10

Which of the following represents the formula for calculating the future value of a single cash flow?

Accepted Answer

FV = PV * (1 + r)^n

Answer

PV = FV * (1 + r)^n

Answer

PV = FV * (1 - r)^n

Answer

FV = PV * (1 - r)^n

Question 11

An annuity can be defined as:

Accepted Answer

A series of equal cash flows occurring at regular intervals

Answer

Combination of equal and unequal cash flows

Answer

Single cash flow occurring at a specific point in time

Answer

Unequal cash flows occurring at irregular intervals

Question 12

Which of the following formulas is used to calculate the future value of a single sum?

Accepted Answer

FV = PV * (1 + r)^n

Answer

FV = PV / (1 + r)^n

Answer

FV = PV + (r * n)

Answer

FV = PV - (r * n)

Question 13

Which of the following statements best defines equivalent annual cost (EAC)?

Accepted Answer

The uniform annual amount that, if invested at a given interest rate over a specified period, would be equivalent to a given series of cash flows.

Answer

The total cost of a project divided by its lifespan.

Question 14

What is the key distinction between simple and compound interest?

Accepted Answer

With compound interest, interest is earned on both the principal and the accumulated interest, while with simple interest, interest is only earned on the principal.

Answer

Compound interest is calculated more frequently than simple interest.

Question 15

What is the effective annual interest rate for a nominal annual interest rate of 6%, compounded semi-annually?

Accepted Answer

6.14%

Answer

5.83%

Answer

6.00%

Answer

6.38%

Question 16

In the context of engineering economics, what is a primary application of the concept of equivalence?

Accepted Answer

Comparing the economic feasibility of alternative project proposals.

Answer

Determining the cost of capital.

Answer

Calculating depreciation expenses for assets.