Engineering Economics & Contract Management Flashcards

A project has a Benefit-Cost Ratio (BCR) of 0.85. What does this indicate?

Answer: The project returns $0.85 for every $1 invested

A BCR less than 1.0 means the present value of benefits is less than costs, indicating the project is not economically justified.

Under a Cost-Plus-Incentive-Fee (CPIF) contract, the fee increases when:

Answer: The contractor underruns the target cost

In a CPIF contract, the contractor earns a higher fee when actual costs fall below the target cost, sharing the savings with the owner.

What is the Modified Internal Rate of Return (MIRR) designed to address?

Answer: Multiple sign changes in cash flows causing multiple IRR values

MIRR resolves the problem of multiple IRR values that arise when a project's cash flow stream changes sign more than once.

In contract law, 'liquidated damages' clauses must be:

Answer: A genuine pre-estimate of loss, not a penalty

Liquidated damages must represent a reasonable estimate of the owner's actual loss at the time of contract formation to be enforceable.

A machine costs $50,000 and has a salvage value of $5,000 after 9 years. Using straight-line depreciation, the annual depreciation charge is:

Answer: $5,000

Annual depreciation = ($50,000 - $5,000) / 9 = $45,000 / 9 = $5,000 per year.

Which contract type places the MOST financial risk on the owner?

Answer: Cost-plus-percentage-of-cost

Cost-plus-percentage-of-cost contracts give the contractor no incentive to control costs since their fee grows as costs increase, maximizing owner risk.

The capitalized cost of a project with an annual operating cost of $20,000 and an interest rate of 5% is:

Answer: $400,000

Capitalized cost for a perpetual series = Annual Cost / Interest Rate = $20,000 / 0.05 = $400,000.