Answers To FE Problems

FE-type Sample Questions for PEEA 6e Chapter 1
Chapter 1
1. The fact that one should not add or subtract money unless it occurs at the same
point in time is an illustration of what concept?
(a) time value of money

(b) marginal return
(c) economy of scale
(d) Pareto principle
Answer: (a)
2. If a set of investment alternatives contains all possible choices that can be made,
then the set is said to be which of the following?
(a) coherent
(b) collectively exhaustive
(c) independent
(d) mutually exclusive
Answer: (b)
3. Which of the following examples does not illustrate a cash flow approach?
(a) a payroll manager writes a check to pay a shop worker

(b) a neighbor pays $0.25 to buy a glass of lemonade at a lemonade stand
(c) a hungry teenager pays for snacks with a debit card
(d) a building contractor buys lumber on account at a local lumber yard
Answer: (d)
4. The “discounting” in a discounted cash flow approach requires the use of which
of the following?
(a) an interest rate

(b) the economic value added
(c) the gross margin
(d) the incremental cost
Answer: (a)
5. Risks and returns are generally ______________ correlated.
(a) inversely
(b) negatively
(c) not
(d) positively
Answer: (d)
6. Assuming zero incremental costs for the “do nothing” alternative is generally
(a) appropriate
(b) risky
(c) optimistic
(d) realistic
Answer: (b)
7. Answering “what if” questions with respect to an economic analysis is an

example of which step in the Systematic Economic Analysis Technique?
(a) identifying the investment alternatives

(b) defining the planning horizon
(c) comparing the alternatives
(d) performing supplementary analysis
Answer: (d)
8. Which of the following is useful in making a final selection when multiple criteria
exist?
(a) four discounted cash flow rules

(b) seven step systematic analysis technique
(c) ten principles of engineering economic analysis
(d) weighted factor comparison method
Answer: (d)
9. Time value of money calculations may not be required in an economic evaluation
for all of the following reasons except
(a) annual cash flows are proportional to the first year cash flow
(b) inflation is absent
(c) no investment of capital is required
(d) no differences in the cash flows of the alternatives after the first year
Answer: (b)
10. If a student’s time value of money rate is 30 percent, then the student would be
indifferent between $100 today and how much in one year?
(a) $30
(b) $100
(c) $103
(d) $130
Answer: (d)
11. A bottled mango juice drink must contain at least 17.0% mango juice for proper
taste. The drink is created by blending unprocessed juice from two orchards.
RightRipe Orchard sells unprocessed mango juice that is 12.5% mango juice and
87.5% base liquids. PureBlend Orchard sells unprocessed juice that is 20.0%
mango juice and 80.0% base. What percentage of unprocessed juice from each
orchard is required to exactly meet the 17.0% specification?
(a) 40% RightRipe; 60% PureBlend

(b) 50% RightRipe; 50% PureBlend
(c) 60% RightRipe; 50% PureBlend
(d) Can not be determined from the information given
Answer: (a)
12. A printed circuit board is produced by passing through a sequence of three steps.
The scrap rates for steps one through three are 5%, 3%, and 3%, respectively. If
10,000 good parts are needed, the number that should be started at step one is
closest to which of the following?
(a) 11,100
(b) 11,140
(c) 11,190
(d) 11,240
Answer: (c)
13. Reconsider the preceding problem assuming that the sequence can be rearranged
such that the processing step with the 5% scrap rate occurs last rather than first.
Using this redesigned sequence, the number of parts that should be started will
(a) Increase
(b) Decrease
(c) Be unchanged
(d) Cannot be determined from the information given
Answer: (c)
Chapter 2
1. A deposit of $3,000 is made in a savings account that pays 7.5% interest

compounded annually. How much money will be available to the depositor at the
end of 16 years?
(a) $8,877
(b) $10,258
(c) $9,542
(d) $943
Answer: (c)
2. The plan was to leave $5,000 on deposit in a savings account for 15 years at 6.5%
interest compounded annually. It became necessary to withdraw $1,500 at the
end of the 5th year. How much will be on deposit at the end of the 15 year
period?
(a) $11,359
(b) $9,359
(c) $12,043
(d) $10,043
Answer: (d)
3. A child receives $100,000 as a gift which is deposited in a 6% bank account

compounded semiannually. If $5,000 is withdrawn at the end of each half year,
how long will the money last?
(a) 21.0 years

(b) 15.5 years
(c) 25.0 years
(d) 18.0 years
Answer: (b)
4. Your company seeks to take over Good Deal Company. Your company’s offer
for Good Deal is for $3,000,000 in cash upon signing the agreement followed by
10 annual payments of $300,000 starting one year later. The time value of money
is 10%. What is the present worth your company’s offer?
(a) $3,000,000
(b) $2,281,830
(c) $4,843,380
(d) $5,281,830
Answer: (c)
5. If you want to triple your money at an interest rate of 6% per year compounded
annually, for how many years would you have to leave the money in the account?
(a) 12 years
(b) 19 years
(c) 32 years
(d) cannot be determined without knowing the amount invested.
Answer: (b)
6. Let F be the accumulated sum, P the principal invested, i the annual compound
interest rate, and n the number of years. Which of the following correctly relates
these quantities?
(a) F = P (1 + in)
(b) F = P (1 + i)n
(c) F = P (1 + n)i
(d) F = P (1 + ni)n-1
Answer: (b)
7. The maintenance costs of a car increase by $200 each year. This cash flow
pattern is best described by which of the following?
(a) gradient series

(b) geometric series
(c) infinite series
(d) uniform series
Answer: (a)
8. If you invest $5,000 three years from now, how much will be in the account
fifteen years from now if i = 10% compounded annually.
(a) $8,053
(b) $15,692
(c) $20,886
(d) $27,800
Answer: (b)
9. The president of a growing engineering firm wishes to give each of 20 employees

a holiday bonus. How much needs to be deposited each month for a year at a
12% nominal rate, compounded monthly, so that each employee will receive a
$2,500 bonus?
(a) $2,070
(b) $3,840
(c) $3,940
(d) $4,170
Answer: (c)
10. What is the annual interest rate if a simple interest loan of $10,000 for four years
charges a total of $2,800 interest? The loan is repaid with a single payment at the
end of year four.
(a) 7.0%
(b) 28.0%
(c) i such that 12,800 = 10,000 (F|P,i,4)
(d) cannot be determined from the information given
Answer: (a)
11. What is the effective annual interest rate if the nominal annual interest rate is 24%
per year compounded monthly?
(a) 2.00%
(b) 24.00%
(c) 26.82%
(d) 27.12%
Answer: (c)
12. Under what circumstances are the effective annual interest rate and the period
interest rate equal?
(a) Never true

(b) If the number of compounding periods per year is one
(c) If the number of compounding periods per year is infinite
(d) Always true
Answer: (b)
13. Consider the following cash flow diagram. What is the value of X if the present
worth of the diagram is $400 and the interest rate is 15% compounded annually?
200
X X
0 1 2 3
(a) $246
(b) $165
(c) $200
(d) $146
Answer: (b)
14. A young engineer calculated that monthly payments of $A are required to pay off
a $5,000 loan for n years at i% interest, compounded annually. If the engineer
decides to borrow $10,000 instead with the same n and i%, her monthly payments
will be $2A.
(a) TRUE
(b) FALSE
(c) Can not be determined without knowing the value of n and i
(d) Can not be determined without knowing the value of n or i
Answer: (a)
Chapter 3
1. When repaying a loan using Method 1 (interest each period; principal only at
end), what can be said about the payments?
(a) The interest payments will decrease by a constant amount each period.
(b) The interest payments will increase by a constant amount each period.
(c) The interest payments will either increase or decrease, but not necessarily by a
constant amount each period.
(d) The interest payments will remain constant from period to period.
Answer (d)
2. When repaying a loan using Method 3 (equal end-of-period payments), which of

the following is true?
(a) Interest payments will increase and principal payments will decrease from
period to period.
(b) Interest payments will decrease and principal payments will increase from
period to period.
(c) Interest payments and principal payments will both increase from period to
period.
(d) Interest payments and principal payments will both decrease from period to
period.
Answer (b)
3. When repaying a loan using the four methods presented in chapter 3 (assuming no
taxes and no inflation), what can be said about the borrower’s preferred payment
method?
(a) Since Method 3 is most commonly used, it is the preferred method.
(b) Method 2 is preferred if the borrower’s TVOM < lender’s interest rate and
Method 4 is preferred otherwise.
(c) Method 4 is preferred if the borrower’s TVOM < lender’s interest rate and
Method 2 is preferred otherwise.
(d) Methods 1 and 3 are equally advantageous to the borrower.
Abswer (b)
4. A house is to be purchased for $180,000 with a 10% down payment, thereby

financing $162,000 with a home loan and mortgage. There are no “points” or
other closing charges associated with the loan. A conventional 30 year loan is
used at 7.5%, resulting in monthly payments of $1132.73. The interest portion of
the first monthly payment will be what?
(a) $1012.50
(b) $682.73
(c) $120.23
(d) Answer cannot be determined without more information.
Answer (a)
5. A house is to be purchased for $270,000 with a 5% down payment, thereby

financing $256,500 with a home loan and mortgage. There are 2 “points”
assessed and there are additional closing charges of $3500 at the time of closing,
with both “points” and additional charges being included in the loan. A
conventional 30 year loan is used at 7.5%, resulting in monthly payments of
$1853.83. Which of the following statements is false?
(a) The loan will be figured on a total of $265,130 borrowed.
(b) There can (unfortunately) be multiple methods of computing the APR (annual
percentage rate) on such a loan, yielding (usually slightly) different answers.
(c) The effective interest rate will exceed 7.5%.
(d) The APR will be less than 7.5%.
Answer (d)
6. You want to purchase a house and you have done a thorough job of identifying
many different local and Web-based financing plans. Various plans have
different up-front charges, and you intend to roll all such charges into the loan,
thereby paying no loan-related charges out of your pocket at time of closing.
Your best estimate is that you will be in the house for only 5 years, at which time
you will sell it and move on. Right now, you want to determine the most
economically advantageous financing plan. Your approach should be to calculate
which of the following for each financing alternative?
(a) Determine all payments you will make over the 5 years, including the loan
“payoff” at the end of the 5 years, and determine the PW using your TVOM;
select the largest (least negative) PW.
(b) Determine all payments you will make over the 5 years, including the loan
“payoff” at the end of the 5 years, and determine the PW using the loan rate of
interest; select the largest (least negative) PW.
(c) Determine the PW at your TVOM of the estimated market value of the house
after 5 years, less all monthly payments you will make over the 5 years; select
the largest PW.
(d) Determine the PW at your loan rate of interest of the estimated market value
of the house after 5 years, less all monthly payments you will make over the 5
years; select the largest PW.
Answer (a)
7. Consider a 7/1 ARM loan, starting at 5.0% with potential up-or-down yearly
increments of 1.0% in the rate. Why is such an ARM loan potentially
economically dangerous?
(a) Actually, many people have financed their house with an ARM and such loans
are not considered potentially economically dangerous.
(b) The loan interest rate can increase without limit over the life of the loan.
(c) The loan interest rate for the example mentioned can start at 5% and increase
to as much as 12% after 7 years, effectively doubling (+/-) the monthly
payment.
(d) The economic risk of an ARM loan is neutralized because it is just as likely
that the interest rate for the example mentioned could go down each year by
the maximum amount.
Answer (c)
8. One of your financing options is a balloon loan on a $200,000 30 year mortgage

with monthly payments and an interest rate of 7.5% per year. Which of the
following statements is correct?
(a) Monthly payments are $1500 and balloon payment is $200,000 after 30 years.
(b) Monthly payments are $1500 and balloon payment is more than $200,000
after 30 years.
(c) Monthly payments are $1250 and balloon payment is $200,000 only after 30
years.
(d) Monthly payments are $1250 and balloon payment is $200,000 at any time the
loan is paid off.
Answer (d)
9. You borrow $5000 at 10% per year and will pay off the loan in 3 equal annual
payments starting one year after the loan is made. The end-of-year payments are
$2010.57. Which of the following is true for your payment at the end of year 2?
(a) Interest is $500.00 and principal is $1510.57.
(b) Interest is $450.00 and principal is $1560.57.
(c) Interest is $348.94 and principal is $1661.63.
(d) Interest is $182.78 and principal is $1827.79.
Answer (c)
10. You borrow $10,000 at 15% per year and will pay off the loan in 3 equal annual
payments with the first occurring at the end of the 4th year after the loan is made.
The three equal annual payments will be $4379.77. Which of the following is
true for your first payment at the end of year 4?
(a) Interest = $4379.77; principal = $0.00.
(b) Interest = $2281.31; principal = $2098.46.
(c) Interest = $1500.00; principal = $2879.77.
(d) Interest = $0.00; principal = $4379.77
Answer (a)
11. You are looking ahead to retirement and desire to invest 7% of your salary in
investments earning 6%. You expect your salary to increase at 5% per year
throughout your working life of 35 years. If you are now earning $50,000 and
you will make your first investment at the end of this year, which of the following
is the correct estimate of the future value of your investments at retirement?
(a) F=$3500(F|P 6%,35)+$175(A|G 6%,35)(F|A 6%,35)
(b) F=$3500(F|A1 6%,5%,35)
(c) F=$3500(F|A1 5%,6%,35)
(d) F=$3500(P|A1 6%,5%,35)(A|P 6%,35)
Answer (b)
12. What series of equal annual payments is equivalent to a series of decreasing

payments as follows: $5000, $4000, $3000, $2000, $1000 if the interest rate is
10% per year?
(a) $3000
(b) $3000(1+0.1) = $3300
(c) [$5000(F|P 10%,4)+$4000(F|P 10%,3)+$3000(F|P 10%,2)+$2000(F|P
10%,1)+1000]/5
(d) $5000(A|P 10%,5)-$1000(A|G 10%,5)
Answer (d)
13. You purchase a $10,000 bond with a bond rate of 6% per year payable
semiannually for 2 years. You pay $9600 for the bond. Which statement is
correct?
(a) Semiannual cash flows will be -$9600, $300, $300, $300, $9900 and the bond
will earn more than 10%
(b) Semiannual cash flows will be -$9600, $300, $300, $300, $9900 and the bond
will earn less than 10%
(c) Semiannual cash flows will be -$9600, $300, $300, $300, $10,300 and the
bond will earn more than 10%
(d) Semiannual cash flows will be -$9600, $300, $300, $300, $10,300 and the
bond will earn less than 10%
14. Consider a cash flow and interest profile as shown:

Year 0 Year 1 Year 2 Year 3
Cash Flow at End of Year -$1000 $3000 $2000 $1000
Interest Rate During Year NA 6% 8% 10%
The worth at the end of Year 3 of these cash flows is:
(a) $5000.00
(b) $5504.72
(c) $5994.56
(d) $5440.00
Answer (b)
Chapter 4
1. When using the "shortest life" planning horizon, what issue should you explicitly
consider for alternatives whose cash flow profiles extend longer than the "shortest
life."
(a) determination of salvage values for truncated cash flows

(b) the validity of the assumption that cash flow profiles are repetitive
(c) both (a) and (b)
(d) neither (a) nor (b)
Answer: (a)
2. Given the following information about sources of capital, what is the appropriate
weighted average cost of capital to use in determining MARR?
Source Before Tax After Tax Proportion of

Cost Cost Total Funds
Loans 10.0% 6.6% 0.20
Bonds 15.0% 9.9% 0.50
Retained Earnings --- 12.0% 0.30
(a) 9.87%
(b) 10.55%
(c) 12.42%
(d) 13.10%
Answer: (a)
3. When using the "longest life" planning horizon, what issue(s) might you have to
consider for alternatives whose cash flow profiles are shorter than the "longest
life"?
(a) determination of salvage values for any truncated cash flows

(b) the validity of the assumption that cash flow profiles are repetitive
(c) both (a) and (b)
(d) neither (a) nor (b)
Answer: (c)
4. Kooche Company plans to invest $1,000,000 in projects next year. $700,000 will
be provided through debt capital with a before tax cost of 7.3%. The remaining
$300,000 will be provided through equity capital at a cost of 6.5%. Kooche’s
corporate tax rate is 40%. What is the weighted average cost of capital?
(a) 5.02%
(b) 6.50%
(c) 7.06%
(d) 13.80%
Answer: (a)
5. Three alternatives are being considered. Alternative A has a useful life of 3 years;
Alternative B, 5 years; and Alternative C, 6 years. Using the longest life
approach, what is the planning horizon?
(a) 6 years
(b) 14 years
(c) 18 years
(d) 30 years
Answer: (a)
Alternative B, 6 years; and Alternative C, 8 years. Using the least common
multiple approach, what is the planning horizon?
(a) 30 years
(b) 48 years
(c) 120 years
(d) 240 years
Answer: (c)
Alternative B, 2 years; and Alternative C, 3 years. What is the difference (in
years) between the planning horizons determined by the longest life approach and
the least common multiple approach?
(a) 0 years
(b) 6 years
(c) 12 years
(d) 30 years
Answer: (a)
8. Which of the following best represents the relationship between the weighted
average cost of capital (WACC) and the minimum attractive rate of return
(MARR)?
(a) WACC and MARR are unrelated

(b) WACC is a lower bound for MARR
(c) WACC is an upper bound for MARR
(d) MARR <= WACC
Answer: (b)
9. Which of the following is true about the minimum attractive rate of return
(MARR) used in judging the economic value of projects?
(a) MARR has no bearing on engineering projects

(b) MARR is the same for all companies
(c) MARR is usually much smaller than the interest rate used in discounted cash
flow analysis
(d) the value of MARR is usually determined by management based on many
factors
Answer: (d)
10. The after tax cost of capital for a loan is less than the effective interest rate on the
loan for the following reason?
(a) discounting
(b) inflation
(c) MARR
(d) tax deductions
Answer: (d)
11. The “weights” in the weighted average cost of capital (WACC) approach are
usually determined based on which of the following?
(a) 1/n where n is the number of sources

(b) negotiations with fund providers
(c) proportion of funds obtained from each source
(d) the ratio of the after tax cost for each source
Answer: (c)
12. Within the context of engineering economy, beta (β) symbolizes which of the
following?
(a) The corporate tax rate

(b) The price of a company’s preferred stock
(c) The ratio of common stock price to preferred stock price
(d) The volatility of a stock relative to the overall market
Answer: (d)
13. When calculating the weighted average cost of capital, the costs of which of the
following types of capital include a (1-T) multiplier, where T is the effective tax
rate?
(a) Debt capital

(b) Equity capital
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer: (a)
Chapter 5
1. When using present worth to evaluate the attractiveness of a single alternative,

what value is the calculated PW compared to in determining if an investment is
attractive?
(a) 0.0
(b) MARR
(c) 1.0
(d) WACC
Answer: (a)
2. A natural gas well is projected to produce $200,000 in profit during its first year
of operation, $190,000 the second year, $180,000 the third year, and so on
continuing this pattern. If the well is expected to produce for a total of 10 years,
and the effective annual interest rate is 8%, which of the following most closely
represents the present worth of the well?
(a) $1,770,000
(b) $1,508,000
(c) $1,253,000
(d) $1,082,000
Answer: (d)
3. The present worth of a multi-year investment with all positive cash flows
(incomes) other than the initial investment is PW = $10,000 at MARR = i%. If
MARR changes to (i+1)%, the present worth will be
(a) less than $10,000

(b) equal to $10,000
(c) greater than $10,000
(d) cannot determine without the cash flow profile and a value for i
Answer: (a)
4. Consider the following cash flow diagram. Which of the following expressions is
not a valid expression for the present worth?
$250 $250 $250

$200
$150
$100
+ 0 1 2 3 4 5 6 10%/yr
-
(a) P = 100(P|A,10,6) + 50(P|G,10,3) + 150(P|A,10,3)(P|F,10,3)

(b) P = 100(P|A,10,3) + 50(P|G,10,3) + 250(P|A,10,3)(P|F,10,3)
(c) P = 250(P|A,10,6) - 50(P|G,10,3)
(d) P = 100(P|A,10,4) + 50(P|G,10,4) + 250(P|A,10,2)(P|F,10,4)
Answer: (c)
5. Ivan the industrial engineer is working a homework problem for Engineering

Economy. He needs to calculate the PW at 12% of a cash flow series with $1,000
at t = 3, $1,500 at t = 4 and $2,000 at t = 5. If Ivan uses the equation: P =
1000(P/A,12,3) + 500(P/G,12,3), where is the P now located?
(a) t=4
(b) t=2
(c) t=1
(d) t=0
Answer: (b)
6. The owner of a cemetery plans to offer a perpetual care service for grave sites.
The owner estimates that it will cost $120 per year to maintain a grave site. If the
interest rate is 8%, what one-time fee should the owner charge for the perpetual
care service?
(a) $96
(b) $120
(c) $1,500
(d) $12,000
Answer: (c)
7. Consider a palletizer at a bottling plant that has a first cost of $150,000, operating
and maintenance costs of $17,500 per year, and an estimated net salvage value of
$25,000 at the end of thirty years. Assume an interest rate of 8%. What is the
present equivalent cost of the investment if the planning horizon is thirty years?
(a) $335,000
(b) $344,500
(c) $360,000
(d) $395,500
Answer: (b)
8. The heat loss through the windows of a home is estimated to cost the homeowner
$412 per year in wasted energy. Thermal windows will reduce heat loss by 93%
and can be installed for $1,232. The windows will have no salvage value at the
end of their estimated life of eight years. Determine the net present equivalent
value of the windows if the interest rate is 10%.
(a) $412
(b) $812
(c) $1,044
(d) $1,834
Answer (b)
9. An inline filter has an estimated life of nine years. By adding a purifier to the
filter, savings of $300 in annual operating costs can be obtained. Interest on
capital is 8%. Compute the maximum expenditure justifiable for the purifier.
(a) $24
(b) $33
(c) $300
(d) $1,875
Answer: (d)
10. The city council has approved the building of a new bridge over Running Water
Creek. The bridge will cost $17,000 for initial construction and have an annual
maintenance cost of $1,000. The council plans to withdraw money from the city's
Bridges & Highways account to open a special account to cover the initial
construction and to fund a perpetuity to cover the maintenance costs forever.
How much money must be withdrawn from the Bridges & Highways account if
the city can expect to earn 5% on the special account?
(a) $1,000
(b) $17,000
(c) $18,000
(d) $37,000
Answer (d)
11. Two projects, A and B, are analyzed using ranking present worth analysis with
MARR at i%. It is found that PW(A) > PW(B). If MARR is changed to (i+1)%,
what will be the relationship between PW(A) and PW(B)?
(a) PW(A) > PW(B)

(b) PW(A) = PW(B)
(c) PW(A) < PW(B)
(d) can not be determined without the cash flow profiles
Answer: (d)
Chapter 6
1. Moving money forward in time while accounting for the time value of money is
referred to by what term?
(a) weighted average cost of capital

(b) minimum attractive rate of return
(c) discounting
(d) compounding
Answer: (d)
2. When using future worth to evaluate the attractiveness of a single alternative,

what value is the calculated FW compared to in determining if an investment is
attractive?
(a) 0.0
(b) 1.0
(c) MARR
(d) WACC
Answer: (a)
3. If you invest $3,000 three years from now, how much will be in the account
fifteen years from now if i = 8% compounded annually.
(a) $3,500
(b) $7,555
(c) $9,415
(d) $9,516
Answer: (b)
future equivalent cost of the investment if the planning horizon is thirty years?
(a) $3,371,000
(b) $3,517,000
(c) $3,623,000
(d) $3,980,000
Answer: (b)
5. $5,000 is deposited in an account that pays 6% interest. Two years from today,
another $5,000 is deposited. Five years from today $10,000 is withdrawn from
the account. How much money is in the account six years from today?
(a) $0
(b) $2,646
(c) $2,805
(d) $3,056
Answer: (c)
6. Scott wants to accumulate $2,500 over a period of 7 years so that a cash payment
can be made for a new roof on his summer cottage. To have this amount when it
is needed, he will make annual deposits at the end of each year into a savings
account that earns 8% annual interest per year. How much must each annual
deposit be?
(a) $244
(b) $259
(c) $280
(d) $357
Answer: (c)
7. Which of the following expressions will correctly determine the future worth of
the following general cash flow series at time 7?
W W W W W W
0 1 2 3 4 5 6 7 10%
(a) W(F|A,10,3)(F|P,10,4) - W(F|P,10,3) + W(F|A,10,3)

(b) W(F|A,10,3)(F|P,10,3) - W(F|P,10,3) + W(F|A,10,3)
(c) W(F|A,10,7) - W(F|P,10,4)
(d) none of the above
Answer: (a)
8. A piece of machinery costs $20,000 and has an estimated life of eight years and a
scrap value of $2,000. What uniform annual amount must be set aside at the end
of each of the eight years for replacement if the interest rate is 4%?
(a) $1,953
(b) $2,174
(c) $2,250
(d) $2,492
Answer: (a)
9. How much money would be accumulated in 5 years with an initial deposit of

$10,000, if the account earned interest at 12% per year for the first 3 years and at
15% per year for the last 2 years?
(a) $17,623
(b) $18,580
(c) $18,836
(d) $19,078
Answer: (b)
10. A deposit of $800 is planned for the end of each year into an account paying
8%/yr compounded annually. The deposits were not made for the 10th and 11th
years. All other deposits were made as planned. What amount of money will be
in the account after the deposit at the end of 25th year.
(a) $55.397
(b) $55,397
(c) $59,537
(d) $53,597
Answer: (d)
11. Consider the time value of money factors (F|P, i, n) and (F|P, i/12, n*12).
Assume i > 0 and n > 0. What can be said about the value of these factors?
(a) These factors are always equal

(b) These factors are never equal
(c) Cannot determine without knowing either i or n
(d) Cannot determine without knowing both i and n
Answer: (b)
12. The present worth of an alternative is zero. What do we know about the value of
the future worth?
(a) FW < 0
(b) FW = 0
(c) FW > 0
(d) Cannot be determined without cash flows
Answer: (b)
13. On the day your daughter is born, you deposit $1,000 in a college savings account
that earns 8% compounded annually. On each of her birthdays thereafter, up to
and including her 18th birthday, you deposit an additional $1,000. How much
money is in the college account the day after her 18th birthday?
(a) $37,450
(b) $38,950
(c) $41,450
(d) $46,800
Answer: (c)
Chapter 7
annual equivalent cost of the investment if the planning horizon is thirty years?
(a) $29,760
(b) $31,050
(c) $31,980
(d) $35,130
Answer: (b)
2. When using annual worth to evaluate the attractiveness of a single alternative,

what value is the calculated AW compared to in determining if an investment is
attractive?
(a) PW
(b) FW
(c) 0.0
(d) MARR
Answer: (c)
3. The annual worth of an alternative is zero. Which of the following is (are) also
true?
I. PW = 0
II. FW = 0
(a) I
(b) II
(c) Both I and II
(d) Neither I nor II
Answer: (c)
4. The overhead costs in a highly automated factory are expected to increase at an
annual compound rate of 10% for the next 7 years. The overhead cost at the end
of the first year is $200,000. What is the annual worth of the overhead costs for
the seven-year period? The time value of money rate is 8%/yr.
(a) $263,250
(b) $231,520
(c) $200,000
(d) $187,020
Answer: (a)
5. The operating and maintenance expenses for a mining machine are expected to be
$11,000 in the first year, and increase by $800 per year during the 15 year life of
the machine. What uniform series of payments would cover these expenses over
the life of the machine? Interest is 10%/yr compounded annually.
(a) $11,000
(b) $4,223
(c) $13,423
(d) $15,223
Answer: (d)
6. A successful alumnus gives State University $2 million to establish an endowed

scholarship fund. If the university can invest at 5%/yr and gives $100,000 in
scholarships each year, for how many years will the endowment last?
(a) 37 years
(b) 20 years
(c) forever
(d) cannot be determined
Answer: (c)
7. Consider the cash flow profile given in the table below. What is the annual worth
of these costs?
End of Year Cost

0 $1,000
1 $100
2 $200
3 $300
4 $400
5 $300
(a) $418
(b) $436
(c) $502
(d) $536
Answer: (c)
8. A grinding machine has a first cost of $24,000 with an expected useful life of 13
years. Salvage value at the end of its useful life is estimated to be $8,000.
Annual maintenance expenses are $350. What is the equivalent uniform annual
cost of the grinding machine?
(a) $2,370
(b) $2,665
(c) $2,980
(d) $3,010
Answer: (d)
9. Reconsider the grinding machine from the previous question. What is the capital
recovery cost of the grinding machine?
(a) $2,020
(b) $2,665
(c) $2,980
(d) $3,010
Answer: (b)
10. What is the equivalent uniform annual cost of the following cash flow profile?
Assume an interest rate of 15%
End of Year Cost

0 $50,000
1 $100,000
2 $25,000
3 $37,500
(a) $45,130
(b) $53,125
(c) $62,100
(d) $79,050
Answer: (d)
Chapter 8
1. Using an incremental internal rate of return (IRR) analysis the decision to replace
the "current best" by the "challenger" is based on what decision rule
(a) the internal rate of return of the increment is greater than the external rate of
return
(b) the internal rate of return of the increment is greater than the internal rate of
return of the previous increment
(c) the internal rate of return of the increment is greater than zero
(d) the internal rate of return of the increment is greater than MARR
Answer: (c)
2. A company is considering two alternatives, one of which must be implemented.

Of the two projects, A has the higher maintenance cost, but B has the higher
investment cost. The appropriate (and properly calculated) incremental IRR is
17.6%. Which alternative is preferred if the Minimum Attractive Rate of Return
is 20%.
(a) A
(b) B
(c) the company is indifferent between A and B
(d) can not be determined from the information given
Answer: (a)
3. Consider the calculation of an external rate of return (ERR). The positive cash
flows in the cash flow profile are moved forward to t = n using what value of i in
the (F|P,i,n-t) factors?
(a) 0
(b) the unknown value of ERR (i')
(c) MARR
(d) IRR
Answer: (c)
4. If the internal rate of return (IRR) of a well behaved investment alternative is
equal to MARR, which of the following statements about the other measures of
worth for this alternative must be true?
I. PW = 0
II. AW = 0
(a) I only
(b) II only
(c) Neither I nor II
(d) Both I and II
Answer: (d)
5. An investment is guaranteed to have a unique value of IRR if which of the

following is true.
(a) alternating positive and negative cash flows

(b) an initial negative cash flow followed by all positive cash flows
(c) a unique value for ERR
(d) a positive PW at MARR
Answer: (b)
6. Consider the IRR and ERR measures of worth. If we define a "root" to mean a
value for the measure that results in PW = 0, then which of the following
statements is true.
(a) IRR can have multiple roots and ERR can have multiple roots
(b) IRR has only a single root but ERR can have multiple roots
(c) ERR has only a single root but IRR can have multiple roots
(d) IRR has only a single root and ERR has only a single root
Answer: (c)
7. When conducting an incremental analysis, what step must always be taken
immediately prior to beginning the pair wise comparisons.
(a) order the alternatives from highest to lowest initial investment

(b) order the alternatives from lowest to highest present worth
(c) order the alternatives from lowest to highest internal rate of return
(d) order the alternatives from lowest to highest initial investment
Answer: (d)
The next two questions are based on the following "present worth versus interest rate"
graph for a well behaved investment.
Present Worth
Interest Rate
8. If the interest rate at B is 20%, then which of the following best describes the
analysis of the investment?
(a) the IRR of the investment is less than 20%

(b) the IRR of the investment is equal to 20%
(c) the IRR of the investment is greater than 20%
(d) none of the above are true
Answer: (c)
9. The IRR of this investment is located at which point?
(a) A
(b) C
(c) D
(d) E
Answer: (d)
10. If the IRR of Alternative A is 18%, the IRR of Alternative B is 16%, and MARR
is 12%, which of the following is correct.
(a) alternative B is preferred over alternative A.

(b) alternative A is preferred over alternative B.
(c) not enough information is given to determine which alternative is preferred.
(d) neither alternative A nor alternative B is acceptable.
Answer: (c)
11. Consider the following cash flow diagram. What is the value of X if the internal
rate of return is 15%?
X X
0 1 2
$400
(a) $246
(b) $255
(c) $281
(d) $290
Answer: (a)
12. What is the internal rate of return of the following cash flow diagram?
$30 $31
0 1 2 3
$15
$30
(a) 20.0%
(b) 18.2%
(c) 17.5%
(d) 15.0%
Answer: (d)
13. A snow cone machine at an ice cream shop costs $15,000. The machine is
expected to generate profits of $2,500 each year of its 10 year useful life. At the
end of the 10 years the machine will have a salvage value of zero. Within what
interest rate range does the IRR fall?
(a) Less than 10%

(b) 10% to 12%
(c) 12% to 14%
(d) Greater than 14%
Answer: (b)
Chapter 9
1. A lumber company purchases and installs a wood chipper for $200,000. The
chipper is classified as MACRS 7-year property. The chipper’s useful life is 10
years. The estimated salvage value at the end of 10 years is $25,000. Using
MACRS depreciation, compute the first year depreciation.
$17,500.00
$20,000.00
$25,007.50
$28,580.00
Answer: (d)
2. A lumber company purchases and installs a wood chipper for $200,000. The
chipper is classified as MACRS 7-year property. The chipper’s useful life is 10
years. The estimated salvage value at the end of 10 years is $25,000. Using
Straight Line depreciation, compute the first year depreciation.
(a) $28,571.43
(b) $20,000.00
(c) $17,500.00
(d) $25,000.00
Answer: (c)
3. The concept similar to depreciation that is applied to natural resources is called

what?
(a) Depletion
(b) Declining Balance
(c) Amortization
(d) MACRS
Answer: (a)
4. An x-ray machine at a dental office is MACRS 5-year property. The x-ray
machine costs $6,000 and has an expected useful life of 8 years. The salvage
value at the end of 8 years is expected to be $500. Assuming MACRS
depreciation, what is the book value at the end of the third year?
(a) $1,584
(b) $1,728
(c) $3,916
(d) $4,272
Answer: (b)
5. Which of the following is not a requirement for an asset to be depreciable?
(a) It must have a life longer than 1 year

(b) It must have a basis (initial purchase plus installation cost) greater than $1,000
(c) It must be held with the intent to produce income
(d) It must wear out or get used up
Answer: (b)
6. MACRS-GDS deductions are a combination of which other methods of

depreciation?
(a) Sum of Years Digits and Straight Line

(b) Sum of Years Digits and Declining Balance
(c) Double Declining Balance and 150% Declining Balance
(d) Double Declining Balance and Straight Line
Answer: (d)
7. Production equipment used in the bottling of soft drinks (MACRS-GDS, 10 year

property) is purchased and installed for $630,000. What is the depreciation
deduction in the 4th year under MACRS-GDS?
(a) $90,720
(b) $78,687
(c) $72,576
(d) $48,510
Answer: (c)
8. Which of the following is (are) required to calculate MACRS-GDS depreciation
deductions?
I. Property Class
II. Salvage Value
III. First Cost
IV. Annual Maintenance Costs
(a) I and III only

(b) II and III only
(c) I, II, and III
(d) I, II, III, and IV
Answer: (a)
9. The depreciation deduction for year 11 of a 15-year property with a 20-year class
life is $4,000. If the salvage value of the asset is estimated to be $5,000 and
MACRS-GDS is used to calculate the depreciation deduction for year 11, what
was the initial cost of the asset?
(a) $42,105
(b) $67,682
(c) $72,682
(d) $80,000
Answer: (b)
10. The depreciation deduction for year 11 of an asset with a 20-year useful life is
$4,000. If the salvage value of the asset was estimated to be zero and straight line
depreciation was used to calculate the depreciation deduction for year 11, what
was the initial cost of the asset?
(a) $42,105
(b) $67,682
(c) $72,682
(d) $80,000
Answer: (d)
11. Which of the following is not true about depreciation?
(a) depreciation is not a cash flow

(b) to be depreciable, an asset must have a life longer than one year
(c) a 5-year property will generate a regular MACRS-GDS depreciation
deductions in six fiscal years.
(d) for MACRS-GDS an estimate of the salvage values is required
Answer: (d)
12. The depreciation allowance for a $100,000 MACRS-GDS asset was $8,550 after
its third year. What was the depreciation allowance after its second year?
(a) $8,550
(b) $9,500
(c) $18,000
(d) Cannot be determined with the information given
Answer: (b)
Chapter 10
1. The correctly calculated taxes due on a corporate taxable income of $13,000,000

are closest to which of the following? (Table 10.1 or similar is required for this
question.)
(a) $3,400,000
(b) $4,420,000
(c) $4,450,000
(d) $4,550,000
Answer: (c)
2. When a business calculates taxable income from gross income, which of the
following is true?
(a) depreciation, interest, and principal are all subtracted

(b) depreciation and interest are subtracted, principal is not
(c) depreciation is subtracted, interest and principal are not
(d) interest and principal are subtracted, depreciation is not
Answer: (b)
3. Consider the following data extracted from an After Tax Cash Flow calculation.
Before Tax Cash Flow = 22,500

Loan Principal Payment = 5,926
Loan Interest Payment = 2,400
MACRS Depreciation Deduction = 16,665
Which of the following is closest to the Taxable Income?
(a) -$2,491
(b) -$91
(c) $3,435
(d) $14,174
Answer: (c)
4. Consider the following data extracted from an After Tax Cash Flow calculation.
Before Tax Cash Flow = 22,500

Loan Principal Payment = 7,434
Loan Interest Payment = 892
MACRS Depreciation Deduction = 7,405
Taxes Due = 5,397
Which of the following is closest to the After Tax Cash Flow?
(a) $1,372
(b) $8,777
(c) $8,806
(d) $16,211
Answer: (b)
5. The marginal tax rate on a corporate income of $87,000 is closest to which of the
following? (Table 10.1 or similar is required for this question.)
(a) 15.0%
(b) 20.5%
(c) 25.0%
(d) 34.0%
Answer: (d)
6. The average tax rate on a corporate income of $87,000 is closest to which of the
following? (Table 10.1 or similar is required for this question.)
(a) 15.0%
(b) 20.5%
(c) 25.0%
(d) 34.0%
Answer: (b)
7. When considering the use of debt capital to finance a project, the upper limit for
the interest rate on an attractive loan can be determined by which of the
following?
(a) MARR
(b) MARR * (1 + tax rate)
(c) MARR / (1 – tax rate)
(d) MARR * (1 – tax rate)
Answer: (c)
8. Consider the following data for 20x6 from an after tax cash flow analysis. What
is the after tax cash flow for 20x6?
before tax cash flow = $23,000

loan principal payment = $3,203
loan interest payment = $3,877
depreciation deduction = $12,490
taxable income = $6,633
taxes due = $2,255
(a) $20,744
(b) $13,665
(c) $3,430
(d) $1,175
Answer: (b)
9. Consider the following data for 2007 from an after-tax cash flow analysis. What
is the taxable income for 2007?

loan interest payment = $3,877
taxes due = $2,255
after tax cash flow = $21,530
(a) $40,000
(b) $35,540
(c) $6,633
(d) $28,460
Answer: (c)
10. Consider the following data for 20x4 from an after tax cash flow analysis. What
is the loan interest payment for 20x4?

taxable income = $8,018
taxes due = $2,726
after tax cash flow = $10,194
(a) $1,274
(b) $3,062
(c) $7,062
(d) $11,080
Answer: (b)
Chapter 11
1. A company owns a 6-year old gear hobber that has a book value of $60,000. The
present market value of the hobber is $80,000. A new gear hobber can be
purchased for $450,000. Using an insider's point of view, what is the net first cost
of purchasing the new gear hobber?
(a) $310,000
(b) $370,000
(c) $390,000
(d) $450,000
Answer: (b)
2. A company owns a 6-year old gear hobber that has a book value of $60,000. The
present market value of the hobber is $80,000. A new gear hobber can be
purchased for $450,000. Using an outsider’s point of view, what is the net first
cost of purchasing the new gear hobber?
(a) $310,000
(b) $370,000
(c) $390,000
(d) $450,000
Answer: (d)
3. In evaluating a piece of equipment for its optimal replacement interval, the

following table of equivalent uniform annual costs is obtained. What is the
optimal replacement interval for the equipment?
n EUAC(n)
1 1582.00
2 1550.00
3 1575.00
4 1580.00
(a) 1 year
(b) 2 years
(c) 3 years
(d) 4 years
Answer: (b)
4. A radiology clinic is considering buying a new $700,000 x-ray machine which
will have no salvage value after installation since the cost of removal will be
approximately equal to its sales value. Maintenance is estimated at $24,000 per
year as long as the machine is owned. After ten years the x-ray source will be
depleted and the machine must be scrapped. Which of the following represents
the most economic life of this x-ray machine?
(a) one year since it will have no salvage after installation

(b) five years since the maintenance costs are constant
(c) ten years because maintenance costs don't increase
(d) cannot be determined from the information given
Answer: (c)
5. Which of the following is not an approach to replacement analysis?
(a) cash flow approach

(b) insider viewpoint
(c) outsider viewpoint
(d) supply chain approach
Answer: (d)
6. The most common approach to determining the planning horizon for replacement
analysis is which of the following?
(a) Shortest life

(b) Median Life
(c) Longest life
(d) Least Common Multiple
Answer: (a)
7. A company owns a 5-year old turret lathe that has a book value of $20,000. The
present market value of the lathe is $16,000. A new turret lathe can be purchased
for $45,000. Using a before tax analysis and an outsider's point of view, what is
the first cost of keeping the old lathe?
(a) $29,000
(b) $45,000
(c) $20,000
(d) $16,000
Answer: (d)
8. A company owns a 5-year old turret lathe that has a book value of $20,000. The
present market value of the lathe is $16,000. A new turret lathe can be purchased
for $45,000. Using a before tax analysis and an insider’s point of view, what is
the first cost of the new lathe?
(a) $29,000
(b) $45,000
(c) $25,000
(d) $16,000
Answer: (a)
9. What two cost categories form the trade off that leads to an optimal replacement
interval?
(a) Direct costs and indirect costs

(b) Insider costs and outsider costs
(c) Operating & maintenance costs and capital recovery costs
(d) Sunk costs and opportunity costs
Answer: (c)
10. Increasing the magnitude of the initial investment tends to ____________ the
optimum replacement interval.
(a) Decrease
(b) Increase
(c) Reverse
(d) Not affect
Answer: (b)
Chapter 12
1. Logan is conducting an economic evaluation under inflation using the then-

current approach. If the inflation rate is j and the real time value of money rate is
d, which of the following is the interest rate he should use for discounting the cash
flows?
(a) j
(b) d
(c) j+d
(d) j + d + dj
Answer: (d)
2. Mike’s Veneer Shop owns a vacuum press that requires annual maintenance.
Mike has a contract to cover the maintenance expenses for the next five years.
The contract calls for an annual payment of $600 with adjustment each year for
inflation. Inflation is expected to hold constant at 6%/yr over this period. The
then-current cash flow pattern for this expense is best described by which of the
following?
(a) uniform series

(b) gradient series
(c) geometric series
(d) continuous series
Answer (c)
3. Mike’s Veneer Shop owns a vacuum press that requires annual maintenance.
Mike has a contract to cover the maintenance expenses for the next five years.
The contract calls for an annual payment of $600 with adjustment each year for
inflation. Inflation is expected to hold constant at 6%/yr over this period. The
constant dollar cash flow pattern for this expense is best described by which of the
following?
(a) uniform series

(b) gradient series
(c) geometric series
(d) continuous series
Answer (a)
4. An economist has predicted that there will be a 7% per year inflation of prices
during the next ten years. If this prediction proves to be correct, an item that
presently sells for $10 would sell for what price in ten years?
(a) $ 5.08
(b) $10.70
(c) $17.00
(d) $19.67
Answer: (d)
5. If the real discount rate is 7% and the inflation rate is 10%, which of the following
interest rates will be used to find the present worth of a series of cash flows that
are in then-current dollars?
(a) 10.0%
(b) 17.7%
(c) 7.0%
(d) 10.7%
Answer: (b)
6. If the real discount rate is 7% and the inflation rate is 10%, which of the following
interest rates will be used to find the present worth of a series of cash flows that
are in constant-worth dollars?
(a) 10.0%
(b) 17.7%
(c) 7.0%
(d) 10.7%
Answer: (c)
7. When done correctly, what is the relationship between the present worth of an
alternative calculated using a then-current approach and the present worth of the
alternative calculated using a constant-worth approach?
(a) they are equal

(b) then-current PW is higher because it uses inflated dollars
(c) constant worth PW is higher because is uses a lower discount rate
(d) cannot be determined without knowing the cash flows and inflation rate
Answer: (a)
8. A government agency has reported the quarterly inflation rates shown below for
the previous four quarters. What was the effective annual inflation rate?
Quarter Quarterly Inflation Rate

1 3%
2 2%
3 4%
4 2%
(a) 2.00%
(b) 2.75%
(c) 11.00%
(d) 11.45%
Answer: (d)
9. As reported by the Bureau of Labor Statistics, the CPI for 2005 was 585.0 (using
a Base Year of 1967 = 100). The CPI for 2006 was 603.9. Based on this data,
what was the inflation rate for 2006?
(a) 3.23%
(b) 5.85%
(c) 6.04%
(d) 18.9%
Answer: (a)
10. Ten years ago Jennifer bought an investment property for $100,000. Over the ten
year period inflation as held consistently at 3% annually. If Jennifer expects a
13%/yr real rate of return, what would she sell the property for today?
(a) $116,000
(b) $134,400
(c) $339,500
(d) $456,200
Answer: (d)
Chapter 13
1. If total cost for producing widgets can be represented by TC = 8,000 + 0.75*X,

where X is the number of widgets produced and total revenue can be represented
by TR = 4.00*x, what is the breakeven value for number of widgets produced?
(a) 1,684
(b) 2,000
(c) 2,462
(d) 3,763
Answer: (c)
The next five questions refer to the following sensitivity graph
3500
3000
2500
2000
1500
PW
1000
500
0
-30 -20 -10 -500 0 10 20 30
-1000
-1500
Percent Change
Annual Revenue Initial Investment Salvage Value
2. The analysis is most sensitive to changes in which component?
(a) Annual Revenue

(b) Initial Investment
(c) Salvage Value
Answer: (a)
3. The analysis is least sensitive to changes in which component?
(a) Annual Revenue

(b) Initial Investment
(c) Salvage Value
Answer: (c)
4. What is the numeric value of the present worth of the original project (i.e., no
changes)?
(a) -10
(b) 20
(c) 1,000
Answer: (c)
5. What percentage change in initial investment would cause the project to become
unattractive?
(a) -10
(b) 20
(c) 1000
Answer: (b)
6. If a line for “annual expenses” was to be added to the graph what slope would you
expect the line to have?
(a) Positive slope (line rises as it goes left to right

(b) Negative slope (line falls as it goes left to right)
(c) Zero slope (horizontal line)
(d) Infinite slope (vertical line)
Answer: (b)
7. Which of the following is not a method typically used for supplementary analysis
of engineering economy problems
(a) break-even analysis

(b) depreciation analysis
(c) risk analysis
(d) sensitivity analysis
Answer: (b)
8. The probability of weather related crop damage during the growing season in a
typical year is given by the following table. If the interest rate is 8%, what is the
expected present worth of crop damage over the next five years.
Value of Crop Damage Probability

$0 60%
$100,000 25%
$200,000 13%
$300,000 2%
(a) $57,000
(b) $167,000
(c) $240,000
(d) $285,000
Answer: (c)
9. Gooey Bites sells snack packs for $3 per pack. Variable expenses involved in
producing snack packs are estimated to be $1 per pack and fixed costs for
operating the production line are estimated to be $14,000. How many snack
packs must Gooey Bites sell to break even?
(a) 14,000
(b) 3,500
(c) 4,667
(d) 7,000
Answer: (d)
10. Reconsider the previous problem. After making changes to the production line,
Gooey Bites made a profit $36,000 by selling 20,000 snack packs. Variable costs
were modified by the line changes but fixed costs were unaffected. What is the
new variable cost per pack?
(a) 0.33
(b) 0.50
(c) 1.00
(d) 1.50
Answer: (b)
Chapter 14
1. When using the benefit cost ratio measure of worth, what benchmark is the
calculated ratio compared to in determining if an individual investment is
attractive?
(a) 0.0
(b) MARR
(c) 1.0
(d) IRR
Answer: (c)
2. Consider a situation in which you do not know the timing or amounts of

individual cash flows. However you do know the discounted and summed values
of the revenues, Rt*(P|F,MARR,t), and the discounted and summed values of
the expenses, Ct*(P|F,MARR,t). Which of the following measures of worth can
you calculate?
I. PW
II. B/C ratio
(a) I only
(b) II only
(c) Both I and II
(d) Neither I nor II
Answer: (c)
3. Elm City is considering a replacement for its police radio. The benefits and costs
of the replacement are shown below. What is the benefit cost ratio of the
replacement if the effective annual interest rate is 8%?
Purchase Cost: $7,000

Annual Savings: $1,500
Life: 15 years
(a) 3.21
(b) 1.83
(c) 1.76
(d) 1.34
Answer: (b)
4. A library shelving system has a first cost of $20,000 and a useful life of 10 years.
The annual maintenance is expected to be $2,500. The annual benefits to the
library staff are expected to be $9,000. If the effective annual interest rate is 10%,
what is the benefit cost ratio of the shelving system?
(a) 1.51
(b) 2.24
(c) 1.73
(d) 1.56
Answer: (d)
5. The two most common forms of benefit cost analysis are:
(a) B/C and B-C

(b) B/C and B*C
(c) B+C and B-C
(d) B-C and B*C
Answer: (a)
6. Which of the following would be least likely to use public sector economic
analysis?
(a) A Library Board

(b) A Public Housing Authority
(c) A Travel Agency
(d) A Veteran’s Hospital
Answer: (c)
7. Which of the following are typical characteristics of public sector projects?
I. Large first costs

II. Benefits that may be hard to quantify
III. Benefits that are realized quickly
(a) I and III only

(b) I and II only
(c) II and III only
(d) I, II, and III
Answer: (b)
8. An integrated public-private partnership to deliver public projects is known by

which of the following acronyms?
(a) EOQ
(b) DCF
(c) IRR
(d) BOT
Answer: (d)
9. An approach to justifying public sector projects that minimizes revenues while

still allowing a business to earn a fair return for its shareholders is
(a) Revenue Requirements

(b) Revenue Effectivity
(c) Cost Plus Pricing
(d) Activity Based Costing
Answer: (a)
10. When using a benefit cost analysis to evaluate multiple alternatives, which of the
following approaches is acceptable?
(a) Ranking approach only

(b) Incremental approach only
(c) Either Incremental or Ranking
(d) Neither Incremental nor Ranking
Answer: (b)
Chapter 15
1. Sarah is considering two investment proposals. Proposal A is to purchase a new

computer. Proposal B is to purchase a new printer. She will not buy the printer
unless she buys the computer. The relationship between Proposals A and B is
best described by which of the following.
(a) B and A are mutually exclusive

(b) B is contingent on A
(c) A is contingent on B
(d) not enough information is given to determine a relationship
Answer: (b)
2. Consider a capital rationing formulation where the binary variables X1 and X2 are
used to represent the acceptance (Xi = 1) or rejection (Xi = 0) of each alternative.
A mutual exclusivity constraint between the two alternatives can be represented
by which of the following?
(a) X1 + X2 <= 1
(b) X2 <= X1
(c) X1 + X2 >= 1
(d) X1 <= X2
Answer: (a)
The requirement that X2 is contingent upon X1 can be represented by which of
the following?
(a) X1 + X2 <= 1
(b) X2 <= X1
(c) X1 + X2 >= 1
(d) X1 <= X2
Answer: (b)
The requirement that the null alternative is not feasible can be represented by
which of the following?
(a) X1 + X2 <= 1
(b) X2 <= X1
(c) X1 + X2 >= 1
(d) X1 <= X2
Answer: (c)
5. Sebastian is about to compare a set of mutually exclusive and indivisible

alternatives using a ranking approach. Which of the following is not an
appropriate measure of worth?
(a) present worth

(b) future worth
(c) annual worth
(d) internal rate of return
Answer: (d)
6. If six investment proposals are under consideration, how many investment

combinations must be evaluated if a complete enumeration approach is being
used?
(a) 6
(b) 2*6 = 12
(c) 62 = 36
(d) 26 = 64
Answer: (d)
7. Which of the following is not an approach which can be used to perform a capital
rationing economic analysis?
(a) Box-Jenkins algorithm

(b) Excel SOLVER
(c) Exhaustive enumeration
(d) Lori-Savage formulation
Answer: (a)
8. To determine an optimal portfolio of investments when the available choices are
divisible, the investment choices should first be ranked in increasing order based
on which of the following?
(a) FW
(b) Initial investment
(c) IRR
(d) PW
Answer: (c)
9. Consider the following binary linear programming formulation of a capital

rationing problem.
Max 1,200 x1 + 600 x2 + 950 x3 + 1,650 x4

s.t. 15,000 x1 + 20,000 x2 + 25,000 x3 + 30,000 x4 <= 70,000
x1 + x2 <= 1
x4 <= x3
x1, x2, x3, x4 = (0,1)
The first cost of project x3 is
(a) 70,000
(b) 25,000
(c) 950
(d) x4
Answer: (b)
10. Consider the following binary linear programming formulation a capital rationing
problem.
Max 1,200 x1 + 600 x2 + 950 x3 + 1,650 x4

s.t. 15,000 x1 + 20,000 x2 + 25,000 x3 + 30,000 x4 <= 70,000
x1 + x2 <= 1
x4 <= x3
x1, x2, x3, x4 = (0,1)
Projects x3 and x4 are
(a) mutually exclusive

(b) x3 is contingent on x4
(c) x4 is contingent on x3
(d) not related
Answer: (c)
11. Consider the following binary linear programming formulation a capital rationing
problem.
Max 1,200 x1 + 600 x2 + 950 x3 + 1,650 x4

s.t. 15,000 x1 + 20,000 x2 + 25,000 x3 + 30,000 x4 <= 70,000
x1 + x2 <= 1
x4 <= x3
x1, x2, x3, x4 = (0,1)
The capital budget limit is
(a) $90,000
(b) $70,000
(c) $30,000
(d) $4,400
Answer: (b)
Chapter 16
1. On a balance sheet, a corporations economic obligations to non-owners is (are)

called:
(a) owners’ equity

(b) liabilities
(c) assets
(d) retained earnings
Answer: (b)
2. The information below has been extracted from the books of the Shelley
Company. Which of the following represents Shelley’s current ratio?
Current assets: Current liabilities:

Cash $86 Accts payable $78
Accounts receivable 130 Wages payable 68
Inventory 140 Taxes payable 28
Total $356 Total $174
(a) 0.76
(b) 1.48
(c) 2.05
(d) 2.51
Answer: (c)
3. The fundamental equation used within an accounting balance sheet is
(a) Net Profit = Gross Profit - Expenses - Taxes

(b) Assets + Liabilities = Net Worth
(c) Assets + Liabilities + Net Worth = 0
(d) Assets = Liabilities + Net Worth
Answer: (d)
4. Marginal cost is:
(a) any cost occurring after "time now"

(b) the ratio of total cost to total quantity of output
(c) the market value of an asset at the end of its life less its disposal costs
(d) the incremental cost of producing one more unit of output
Answer: (d)
5. The three major categories that comprise cost of goods manufactured are:
(a) Material, labor, overhead

(b) Average, marginal, instantaneous
(c) Past, present, future
(d) Initial, operating, salvage
Answer: (a)
6. The total cost equation for producing X widgets is given by TC = $1,000 + 46*X.
The average cost per widget for producing 500 widgets is closest to which of the
following?
(a) $1,000
(b) $6
(c) $8
(d) $4,000
Answer: (c)
7. The total cost equation for producing X widgets is given by TC = $1,000 + $6*X.
The variable cost per widget is closest to which of the following?
(a) $1,000
(b) $6
(c) $8
(d) $4,000
Answer: (b)
8. The total cost equation for producing X widgets is given by TC = $1,000 + $6*X.
The marginal cost per widget at a production level of 300 units is closest to which
of the following?
(a) $2,800
(b) $6
(c) $8
(d) $4,000
Answer: (b)
9. Fixed cost is:
(a) any cost that does not vary with the quantity of output
(b) the ratio of total cost to total quantity of output
(c) the market value of an asset at the end of its life less its disposal costs
(d) the incremental cost of producing one more unit of output
Answer: (a)
10. When an organization considers its work-in-process, how should it be classified

on a balance sheet?
(a) Asset
(b) Liability
(c) Net worth
(d) Expense
Answer: (a)

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FE-type Sample Questions for PEEA 6e Chapter 1

(a) time value of money

(a) a payroll manager writes a check to pay a shop worker

(a) an interest rate

7. Answering “what if” questions with respect to an economic analysis is an

(a) identifying the investment alternatives

(a) four discounted cash flow rules

(a) 40% RightRipe; 60% PureBlend

1. A deposit of $3,000 is made in a savings account that pays 7.5% interest

3. A child receives $100,000 as a gift which is deposited in a 6% bank account

(a) 21.0 years

(a) gradient series

9. The president of a growing engineering firm wishes to give each of 20 employees

(a) Never true

2. When repaying a loan using Method 3 (equal end-of-period payments), which of

4. A house is to be purchased for $180,000 with a 10% down payment, thereby

5. A house is to be purchased for $270,000 with a 5% down payment, thereby

8. One of your financing options is a balloon loan on a $200,000 30 year mortgage

12. What series of equal annual payments is equivalent to a series of decreasing

14. Consider a cash flow and interest profile as shown:

(a) determination of salvage values for truncated cash flows

Source Before Tax After Tax Proportion of

(a) determination of salvage values for any truncated cash flows

(a) WACC and MARR are unrelated

(a) MARR has no bearing on engineering projects

(a) 1/n where n is the number of sources

(a) The corporate tax rate

(a) Debt capital

1. When using present worth to evaluate the attractiveness of a single alternative,

(a) less than $10,000

$250 $250 $250

(a) P = 100(P|A,10,6) + 50(P|G,10,3) + 150(P|A,10,3)(P|F,10,3)

5. Ivan the industrial engineer is working a homework problem for Engineering

(a) PW(A) > PW(B)

(a) weighted average cost of capital

2. When using future worth to evaluate the attractiveness of a single alternative,

(a) W(F|A,10,3)(F|P,10,4) - W(F|P,10,3) + W(F|A,10,3)

9. How much money would be accumulated in 5 years with an initial deposit of

(a) These factors are always equal

2. When using annual worth to evaluate the attractiveness of a single alternative,

6. A successful alumnus gives State University $2 million to establish an endowed

End of Year Cost

End of Year Cost

2. A company is considering two alternatives, one of which must be implemented.

5. An investment is guaranteed to have a unique value of IRR if which of the

(a) alternating positive and negative cash flows

(a) order the alternatives from highest to lowest initial investment

(a) the IRR of the investment is less than 20%

(a) alternative B is preferred over alternative A.

(a) Less than 10%

3. The concept similar to depreciation that is applied to natural resources is called

5. Which of the following is not a requirement for an asset to be depreciable?

(a) It must have a life longer than 1 year

6. MACRS-GDS deductions are a combination of which other methods of

(a) Sum of Years Digits and Straight Line

7. Production equipment used in the bottling of soft drinks (MACRS-GDS, 10 year

(a) I and III only

(a) depreciation is not a cash flow

1. The correctly calculated taxes due on a corporate taxable income of $13,000,000

(a) depreciation, interest, and principal are all subtracted

Before Tax Cash Flow = 22,500

Which of the following is closest to the Taxable Income?

Before Tax Cash Flow = 22,500