CCE CCE Financial Analysis & Economic Evaluation 1 — Questions and Answers
Question 1: What does the Net Present Value (NPV) method measure in engineering economic analysis?
- The payback period of an investment
- The difference between the present value of cash inflows and outflows (Correct answer)
- The average annual return on investment
- The ratio of benefits to costs
Correct answer: The difference between the present value of cash inflows and outflows
NPV measures the difference between the present value of all cash inflows and outflows, with a positive NPV indicating a financially acceptable investment.
Question 2: If a project has an Internal Rate of Return (IRR) greater than the Minimum Attractive Rate of Return (MARR), the project is considered:
- Economically unacceptable
- Economically acceptable (Correct answer)
- Break-even
- Too risky to evaluate
Correct answer: Economically acceptable
When the IRR exceeds the MARR (also called the hurdle rate), the project generates returns above the company's minimum requirement and is economically acceptable.
Question 3: The Benefit-Cost Ratio (BCR) method recommends project acceptance when BCR is:
- Less than 0
- Equal to 0
- Less than 1.0
- Greater than or equal to 1.0 (Correct answer)
Correct answer: Greater than or equal to 1.0
A BCR ≥ 1.0 indicates that the present value of benefits equals or exceeds the present value of costs, making the project economically justified.
Question 4: Which depreciation method allocates an equal amount of depreciation expense each year over the asset's useful life?
- Double Declining Balance
- Sum-of-Years Digits
- Straight-Line (Correct answer)
- MACRS
Correct answer: Straight-Line
The Straight-Line depreciation method divides the depreciable cost equally across each year of the asset's useful life.
Question 5: What is 'salvage value' in the context of engineering economic analysis?
- The original purchase price of an asset
- The estimated market value of an asset at the end of its useful life (Correct answer)
- The annual maintenance cost of an asset
- The replacement cost of an asset after depreciation
Correct answer: The estimated market value of an asset at the end of its useful life
Salvage value is the estimated residual market value of an asset at the end of its useful life, used in depreciation calculations and life-cycle cost analysis.
Question 6: The 'payback period' method calculates:
- The present value of all future cash flows
- The time required to recover the initial investment from net cash inflows (Correct answer)
- The annual rate of return on an investment
- The ratio of net income to total assets
Correct answer: The time required to recover the initial investment from net cash inflows
The payback period measures how many years it takes for cumulative net cash inflows to equal the initial investment, ignoring the time value of money.
CCE CCE Financial Analysis & Economic Evaluation 1
What does the Net Present Value (NPV) method measure in engineering economic analysis?