MEM Engineering Economics 2 — Questions and Answers
Question 1: A company is evaluating two mutually exclusive projects. Project A has an IRR of 18% and Project B has an IRR of 22%. The MARR is 15%. Which statement is most appropriate?
- Always select Project B because it has the higher IRR
- Use incremental IRR analysis to determine the preferred project (Correct answer)
- Select Project A because it likely has a larger scale
- Both projects should be rejected since IRR exceeds MARR
Correct answer: Use incremental IRR analysis to determine the preferred project
For mutually exclusive projects, incremental IRR analysis is required because the higher-IRR project is not necessarily the one that maximizes value.
Question 2: A bond with a face value of $1,000, a coupon rate of 6%, and 10 years to maturity is currently priced at $950. What is the approximate current yield?
- 6.0%
- 6.3% (Correct answer)
- 5.7%
- 6.6%
Correct answer: 6.3%
Current yield = Annual coupon / Current price = $60 / $950 ≈ 6.32%.
Question 3: Which depreciation method results in the highest tax benefit in the early years of an asset's life?
- Straight-line depreciation
- Units-of-production depreciation
- Double-declining balance depreciation (Correct answer)
- Sum-of-years-digits depreciation
Correct answer: Double-declining balance depreciation
Double-declining balance is an accelerated method that applies twice the straight-line rate to the book value, producing the largest deductions in early years.
Question 4: A project requires an initial investment of $500,000 and is expected to generate annual after-tax cash flows of $90,000 for 8 years with no salvage value. What is the payback period?
- 4.2 years
- 5.6 years (Correct answer)
- 6.8 years
- 7.1 years
Correct answer: 5.6 years
Payback period = Initial investment / Annual cash flow = $500,000 / $90,000 ≈ 5.56 years.
Question 5: In a benefit-cost analysis for a public infrastructure project, which item is correctly classified as a disbenefit?
- Initial construction cost paid by the government
- Reduced property values for residents near a new highway (Correct answer)
- Annual operating and maintenance expenses
- Interest payments on project bonds
Correct answer: Reduced property values for residents near a new highway
Disbenefits are negative consequences borne by the public (users or third parties), not the sponsoring agency, such as noise or reduced property values.
Question 6: An engineering project has fixed costs of $200,000 per year, variable costs of $40 per unit, and sells its product at $90 per unit. What is the break-even volume?
- 2,222 units
- 4,000 units (Correct answer)
- 5,000 units
- 3,333 units
Correct answer: 4,000 units
Break-even volume = Fixed costs / (Price − Variable cost) = $200,000 / ($90 − $40) = 4,000 units.
Question 7: What does a sensitivity analysis in engineering economics primarily determine?
- The probability distribution of NPV outcomes
- How much a key variable can change before the project decision reverses (Correct answer)
- The optimal timing for project implementation
- The expected monetary value under uncertainty
Correct answer: How much a key variable can change before the project decision reverses
Sensitivity analysis identifies how sensitive the NPV or IRR decision is to changes in individual input variables, revealing which assumptions are most critical.
MEM Engineering Economics 2
A company is evaluating two mutually exclusive projects.
Project A has an IRR of 18% and Project B has an IRR of 22%.
The MARR is 15%.
Which statement is most appropriate?