CCE Financial Analysis & Economic Evaluation Flashcards

Which economic analysis method is used to convert all costs and benefits to an equivalent annual amount over the project life?

Answer: Annual Worth (AW) method

The Annual Worth (AW) method converts all cash flows to a uniform equivalent annual amount, making it useful for comparing alternatives with different lives.

In engineering economics, the 'time value of money' concept means:

Answer: A dollar received today is worth more than a dollar received in the future

The time value of money reflects that money available today can be invested to earn returns, making present dollars more valuable than the same amount received in the future.

What is the MACRS (Modified Accelerated Cost Recovery System) primarily used for in the United States?

Answer: Federal income tax depreciation of business assets

MACRS is the U.S. federal income tax depreciation system that assigns assets to recovery classes and accelerates deductions in earlier years.

A cost engineer is comparing two mutually exclusive alternatives using incremental analysis. The incremental IRR should be compared to:

Answer: The MARR (Minimum Attractive Rate of Return)

In incremental analysis, the incremental IRR of the higher-cost alternative over the lower-cost one must exceed the MARR to justify the additional investment.

Which of the following best describes 'sunk cost' in economic decision-making?

Answer: A cost already incurred that cannot be recovered regardless of future decisions

A sunk cost is a past expenditure that cannot be recovered and should not influence future economic decisions.

What is the effective annual interest rate equivalent to a nominal rate of 12% compounded monthly?

Answer: 12.68%

Using (1 + 0.12/12)^12 − 1 = (1.01)^12 − 1 ≈ 0.1268 or 12.68%, the effective annual rate exceeds the nominal rate due to monthly compounding.