BSEM Engineering Economics & Cost Estimation 1 — Questions and Answers
Question 1: What is the primary purpose of a benefit-cost ratio (BCR) analysis in engineering projects?
- To compare project benefits to its costs to determine economic viability (Correct answer)
- To calculate the total labor cost of a project
- To estimate material quantities needed for construction
- To schedule project milestones and deadlines
Correct answer: To compare project benefits to its costs to determine economic viability
A BCR greater than 1.0 indicates that the project's benefits outweigh its costs, signifying economic feasibility.
Question 2: Which depreciation method allocates equal expense amounts each year over an asset's useful life?
- Double declining balance
- Sum-of-years digits
- Straight-line depreciation (Correct answer)
- Units of production
Correct answer: Straight-line depreciation
Straight-line depreciation divides the asset's depreciable cost evenly across each year of its useful life.
Question 3: In engineering economics, 'sunk cost' refers to:
- Future costs that can be avoided by a decision
- Costs already incurred and unrecoverable regardless of future decisions (Correct answer)
- Variable costs that fluctuate with production volume
- Costs allocated to overhead and indirect expenses
Correct answer: Costs already incurred and unrecoverable regardless of future decisions
Sunk costs are past expenditures that cannot be recovered and should not influence future engineering or business decisions.
Question 4: What does the term 'payback period' measure in project evaluation?
- The total profit earned over a project's lifetime
- The time required for cumulative savings or revenue to recover the initial investment (Correct answer)
- The interest rate that makes net present value equal to zero
- The ratio of net income to total project cost
Correct answer: The time required for cumulative savings or revenue to recover the initial investment
Payback period calculates how many years it takes for an investment's cash inflows to equal its initial cost.
Question 5: Which cost estimation method relies on historical data from similar completed projects to predict new project costs?
- Bottom-up estimating
- Parametric estimating
- Analogous estimating (Correct answer)
- Three-point estimating
Correct answer: Analogous estimating
Analogous estimating uses actual costs from prior similar projects as a basis for estimating the current project's cost.
Question 6: Net Present Value (NPV) discounts future cash flows back to the present using which rate?
- Inflation rate
- Prime lending rate
- Required rate of return (discount rate) (Correct answer)
- Federal funds rate
Correct answer: Required rate of return (discount rate)
NPV uses the required rate of return as the discount rate to express all future cash flows in today's dollars.
BSEM Engineering Economics & Cost Estimation 1
What is the primary purpose of a benefit-cost ratio (BCR) analysis in engineering projects?