ENG-ECON

Final check — Engineering Economics & Capital Asset Decisions: NPV, Payback, LCC & Repair-vs-Replace

Answer the 36 questions. You need 80% or more to pass. You can retry as many times as you like.

Question 1What core principle states that a sum of money today is worth more than the same sum in the future?The law of diminishing returnsThe time value of moneyThe principle of sunk costsThe conservation of capital

Question 2To convert a future cash flow into its present value, you must:Multiply it by the discount rateAdd the inflation rate to itDiscount it using a discount rateCompound it forward in time

Question 3The present value factor 1/(1+i)^n decreases as:Either the discount rate or the number of periods increasesOnly the cash flow amount increasesThe discount rate falls toward zeroThe project life shortens

Question 4A project costs 50,000 and returns 10,000 per year in equal cash flows. Its simple payback period is:10 years2.5 years5 years0.2 years

Question 5The biggest weakness of the simple payback method is that it:Is too complex to calculateIgnores the time value of money and cash flows after paybackAlways overstates project profitabilityRequires a discount rate to compute

Question 6Net Present Value (NPV) is calculated as:Sum of discounted cash inflows minus the initial investmentTotal undiscounted profit over the asset lifeAnnual savings divided by the discount rateInitial cost divided by annual cash flow

Question 7According to the NPV decision rule, you should accept a project when its NPV is:Less than zeroEqual to the payback periodGreater than zeroEqual to the initial investment

Question 8The Internal Rate of Return (IRR) of a project is the discount rate at which:The payback period equals the project lifeThe NPV equals zeroThe NPV is maximizedCash inflows equal depreciation

Question 9A project is generally acceptable when its IRR is:Below the hurdle rate / cost of capitalAbove the hurdle rate / cost of capitalExactly equal to the inflation rateEqual to zero

Question 10The discount rate used to judge a project against the minimum acceptable return is often called the:Hurdle rateSalvage rateDepreciation rateCoupon rate

Question 11Life-Cycle Cost (LCC) or Total Cost of Ownership (TCO) includes:Only the purchase price of the assetPurchase, operating, maintenance, energy and disposal costs over the whole lifeOnly maintenance and repair costsPurchase price plus financing interest only

Question 12In an LCC analysis, choosing the equipment with the lowest purchase price can be a mistake because:It always has the highest salvage valueHigher operating and energy costs can dominate the total life-cycle costPurchase price is irrelevant to total costCheaper equipment always lasts longer

Question 13For comparing assets with different lifespans, the most appropriate method is:Simple paybackEquivalent Annual Cost (EAC)Gross book valueTotal undiscounted cost

Question 14Equivalent Annual Cost (EAC) converts a project's costs into:A single lump sum at the end of lifeA constant annual cost over the asset's lifeThe undiscounted total of all cash flowsThe salvage value only

Question 15In a repair-versus-replace decision, you should generally replace the asset when:The EAC of keeping/repairing exceeds the EAC of a new assetThe repair cost is lower than the new asset's purchase priceThe old asset is fully depreciatedThe original purchase cost has not yet been recovered

Question 16A cost already incurred that cannot be recovered and should NOT affect a repair-vs-replace decision is a:Marginal costOpportunity costSunk costIncremental cost

Question 17As equipment ages, its repair-vs-replace economics typically shift toward replacement because:Salvage value rises over timeMaintenance, downtime and energy costs tend to riseDepreciation expense increases each yearThe discount rate falls with age

Question 18In a lease-versus-buy analysis, the typical financial advantage of leasing is:You always own the asset at the endLower upfront capital outlay and preserved cash/creditHigher salvage value at end of termElimination of all maintenance obligations forever

Question 19To compare leasing against buying on a fair basis, you should compare the:Nominal undiscounted totals of each optionPresent value of after-tax cash flows of each optionOnly the monthly lease payment versus the cash priceThe book values at the end of the term

Question 20Depreciation is best described as:A cash payment made each year to suppliersThe systematic allocation of an asset's cost over its useful lifeThe increase in an asset's market value over timeThe interest paid on a loan to buy the asset

Question 21Under the straight-line method, annual depreciation equals:(Cost − Salvage value) ÷ Useful lifeCost × Discount rateCost ÷ Salvage value(Cost + Salvage value) ÷ Useful life

Question 22An asset costs 22,000 with a 2,000 salvage value and a 5-year life. Straight-line annual depreciation is:4,0004,4002,0005,000

Question 23Compared with straight-line, the declining-balance (accelerated) method:Records more depreciation in the early yearsRecords equal depreciation every yearRecords more depreciation in the later yearsNever reaches the salvage value

Question 24The book value of an asset at any point in time equals:Its current market resale priceOriginal cost minus accumulated depreciationOriginal cost plus accumulated depreciationThe salvage value times remaining years

Question 25Why does depreciation matter to a capital project's after-tax cash flow even though it is non-cash?It is a direct cash outflow to the tax authorityIt creates a tax shield that reduces taxable income and taxes paidIt increases the asset's salvage valueIt raises the hurdle rate of the project

Question 26A CMMS implementation costs 40,000 and is projected to save 16,000 per year. Its simple ROI payback is:4 years2.5 years1.6 years6.4 years

Question 27Which is the most credible 'hard' saving to include in a CMMS ROI business case?A vague claim that morale will improveReduced unplanned downtime and lower spare-parts inventoryAn assumed doubling of production with no basisThe purchase price of the software itself

Question 28For an LED retrofit, the annual energy saving is calculated from:The number of fixtures onlyPower reduction (kW) × operating hours × electricity priceThe purchase price divided by lamp lifeThe salvage value of the old lamps

Question 29A solar PV project has a payback of about 7 years and an asset life of 25 years. A defensible justification emphasizes:Only the payback period, ignoring the long asset lifeThe positive NPV over the full 25-year life, not just paybackThe fact that solar never requires maintenanceThe lowest possible installation price regardless of output

Question 30When two mutually exclusive projects rank differently under NPV and IRR, the preferred tie-breaker is usually:IRR, because percentages are easier to compareNPV, because it measures the absolute value addedPayback, because it is the simplestThe project with the lower initial cost

Question 31Using a discount rate that is too high in an NPV analysis will tend to:Overstate the value of long-term projectsPenalize long-term projects and reject good investmentsHave no effect on the ranking of projectsAlways increase the calculated NPV

Question 32A 'discounted payback period' improves on simple payback by:Ignoring the salvage valueDiscounting the cash flows before accumulating themUsing undiscounted cash flows for speedCounting only the first year's cash flow

Question 33Incremental cash flow analysis for a capital project should include:Only the changes in cash flow caused by accepting the projectAll historical company costs from prior yearsSunk costs already spent on feasibility studiesAllocated head-office overhead that does not change

Question 34To turn an engineering proposal into a defensible financial case, the engineer should:Present only the technical specificationsQuantify cash flows and apply discounted-cash-flow methods like NPV and IRRRely on the lowest quoted price aloneAvoid any assumptions about future savings

Question 35Performing a sensitivity analysis on a capital decision means:Testing how the result changes when key inputs (e.g. discount rate, savings) varyRecalculating only the purchase priceIgnoring uncertainty to simplify the modelUsing the same single estimate for every input

Question 36Two pumps deliver the same duty: Pump A costs 8,000 with high energy use; Pump B costs 12,000 with low energy use. The correct way to choose is to:Pick Pump A because it has the lower purchase priceCompare the life-cycle cost (purchase plus discounted energy) of eachPick Pump B because it is more expensive and therefore betterChoose based on warranty length only

Final check — Engineering Economics & Capital Asset Decisions: NPV, Payback, LCC & Repair-vs-Replace

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