Quiz: Engineering Economic Analysis

This quiz assesses mastery of the core principles, techniques, and terminology of engineering economic analysis. Questions are grouped by topic and lecture for clarity.

Section	Topic Coverage	Weight
I	Decision Making & Cost Fundamentals (L1, L2)	20%
II	Time Value of Money (L3, L4)	30%
III	Comparison Methods & Analysis (L5, L6, L7)	30%
IV	Advanced Topics & Applications (L8, L9, L10)	20%

I. Decision Making and Cost Fundamentals

Q1: Multiple Choice (L1) - The economic criterion for a fixed output project is: - (A) Maximize profit - (B) Maximize benefits/outputs - (C) Minimize costs/inputs - (D) Maximize Benefit-Cost Ratio

Q2: Short Answer (L2) - Distinguish between Sunk Cost and Opportunity Cost: - Sunk Cost: Money already spent; must be ignored in future decisions - Opportunity Cost: Benefit forgone by choosing one alternative; represents true value sacrificed

Q3: Application (L2) - Types of cost estimates and accuracy: - Rough Estimates: \(-30\%\) to \(+60\%\) - Semidetailed Estimates: \(-15\%\) to \(+20\%\) - Detailed Estimates: \(-3\%\) to \(+5\%\)

II. Time Value of Money

Q4: Calculation / Multiple Choice (L3) - Nominal annual interest rate (\(r\)) of \(18\%\), compounded monthly. What is the effective annual rate (\(i_a\))? - (A) \(18.00\%\) - (B) \(19.56\%\) - (C) \(16.67\%\) - (D) \(18.66\%\) - Formula: \[i_a = \left(1 + \frac{r}{m}\right)^m - 1\] \[i_a = \left(1 + \frac{0.18}{12}\right)^{12} - 1 \approx 0.1956 \text{ or } 19.56\%\]

Q5: Calculation (L4) - Engineer deposits $500 at end of each year for 10 years at \(8\%\) interest. Find Future Worth (\(F\)): - Formula: \(F = A(F/A, i, n)\) - \((F/A, 8\%, 10) \approx 14.486\) - \(F = 500 \times 14.486 = \$7,243.00\)

Q6: Multiple Choice (L5) - PW analysis for alternatives with unequal lives and continuing requirement. Which technique is NOT required? - (A) Use LCM of lives - (B) Use fixed study period, estimate salvage value - (C) Calculate Capitalized Cost - (D) Calculate EUAC for each alternative over its own life

III. Comparison Methods and Analysis

Q7: Calculation (L6) - Equipment cost: \(15,000\), life: 5 years, salvage: \(3,000\), interest: \(10\%\). Find Capital Recovery Cost (EUAC): - Formula: \(EUAC = P(A/P, i, n) - S(A/F, i, n)\) - \((A/P, 10\%, 5) \approx 0.2638\), \((A/F, 10\%, 5) \approx 0.1638\) - \(EUAC = 15,000 \times 0.2638 - 3,000 \times 0.1638 = \$3,465.60\)

Q8: Multiple Choice (L7, L8) - Incremental Rate of Return (\(\Delta IRR\)) decision rule: - (A) Choose highest IRR - (B) Choose B if base IRR > MARR - (C) Choose B if \(\Delta IRR\) of (B-A) ≥ MARR - (D) Maximize NPW at \(\Delta IRR\)

Q9: Discussion (L8) - Depreciation’s effect on cash flow: - Depreciation is a book cost, not a cash cost - Reduces taxable income, resulting in tax savings (ATCF benefit)

IV. Advanced Topics and Applications

Q10: Multiple Choice (L9) - Primary flaw of Payback Period: - (A) Complex calculation - (B) Ignores initial investment - (C) Ignores all cash flows after payback - (D) Requires MARR determination

Q11: Short Answer (L9, L10) - Breakeven Analysis: Determines the value at which two alternatives are equivalent; helps manage uncertainty and focus on critical estimates

Q12: Application and Context (L10, L16) - Public Sector analysis and B/C Ratio: - (a) Acceptability criterion: \(B/C \ge 1.0\) - (b) Objective difference: Private sector maximizes profit; public sector promotes general welfare and benefits to all