Beirut Arab University

Faculty of Engineering
Department of Industrial Engineering and Management

Engineering Economy-INME221
Worksheet#4- MCQ –Comparison & Selection among Alternatives

1. Consider the following two investment alternatives:

Suppose that your firm needs either machine for only 2 years. The net proceeds from the sale of machine
B are estimated to be $200. What should be the required net proceeds from the sale of machine A so that
both machines could be considered economically indifferent at an interest rate of 10%?
 $850
 $750
 $700
 $800

2. A manufacturing company is considering two mutually exclusive

machines E1 and E2 with the following cash flow information:

Which machine would you recommend if the company needs either machine for only 3 years? Assume a
MARR of 12%.

 Cannot compare without knowing the year-end salvage values over their service lives
 Indifferent
 Project E1
 Project E2
3. Consider the following two mutually exclusive service projects with
project lives of 3 years and 2 years, respectively. (The mutually
exclusive service projects will have identical revenues for each year of
service.) The interest rate is known to be 12%.

If the required service period is 6 years, and both projects can be repeated with the given costs and better
service projects are unavailable in the future, which project is better and why? Choose from the following
options:

 Select project A because it will cost $1,818 in NPW each cycle, with only one
replacement, whereas project B will cost $1,138 in NPW each cycle, with two
replacements.
 Select project B because its NPW exceeds that of project A by $680
 Select project B because it will save you $344 in present worth over the required
service period.
 None of the above

4. Two150 horsepower (HP) motors are being considered for installation

at a municipal sewage treatment plant. The first motor costs $4,500
and has an operating efficiency of 83% at full load. The second motor
costs $3,600 and has an efficiency rating of 80% at full load. Both
motors are projected to have zero salvage value after a life of 10
years. The annual operating and maintenance cost (excepting power
cost) amounts to 15% of the original cost of each motor. The power
costs are a flat 5 cents per kilowatt hour. The minimum number of
hours of full load operation per year necessary to justify the purchase
of the more expensive motor at i = 6% falls in which one of the
following ranges?

 851 hours to 900 hours

 901 hours to 950 hours
 1,001 hours to 1,050 hours
 951 hours to 1,000 hours
5. Your firm is considering a new machine for production of a new
consumer product. You have identified two different machines that are
capable of performing the job. The expected net cash flows are as
follows:

What is the equivalent annual net savings if you decide to go with Machine B? Assume that your firm’s
interest rate (cost of capital) is known to be 12%.

 $987
 $6,965
 $1,300
 $1,500

6. Two options are available for painting your house: (1) Oil based
painting, which costs $5,000 and (2) water based painting, which
costs $3,000. The estimated lives are 10 years and 5 years
respectively. For either option, no salvage value will remain at the end
of respective service lives. Assume that you will keep and maintain the
house for 10 years. If your personal interest rate is 10% per year,
which of the following statement is correct?
 On an annual basis, Option 2 is about $22 cheaper than Option 1
 On an annual basis, Option 1 will cost about $850
 On an annual basis, both options cost about the same
 On an annual basis, Option 2 will cost about $820

7. A manufacturing company is considering two types of industrial

projects that require the same level of initial investment but provide
different levels of operating cash flows over the project life. The in
house engineer has compiled the following financial data related to
both projects, including the rate of return figures.
 The company has been using the internal rate of return as a project justification tool, and these
projects will be evaluated based on the principle of rate of return. The firm’s minimum required rate of
return is known to be 12%. Which project should you select?

 Select B, because it can generate 20% profit (as opposed to 18% for project A) for
every dollar invested.
 Select A, because its increment of investment exceeds 12%.
 Select B, because its rate of return is higher than A with the same initial investment.
 Select B, because it recovers most of investment during the first year.

8. Consider the following investment projects

Determine the range of MARR where project 2 would be preferred over project 1.

 MARR ≤ 12.5%
 16% ≤ MARR
 13% ≤ MARR ≤ 15%
 Not enough information to determine

9. The following information on two mutually exclusive projects is given

below:

Which of the following statements is correct?

 Project B would be a better choice as long as the investor’s MARR is less than 25%.
 Project B is a better choice regardless of the investor’s MARR.
 Since the two projects have the same rate of return, they are indifferent.
  Project A would be a better choice, as the required investment is smaller with the
same rate of return.

10.You are evaluating five investment projects. You already calculated

the rate of return for each alternative investment and incremental
rate of return between the two alternatives as well. In calculating the
incremental rate of return, a lower cost investment project is
subtracted from the higher cost investment project. All rate of return
figures are rounded to the nearest integers.

If all investment alternatives are mutually independent and the MARR is 10%, which of the following
statements is correct?

 Select B, D and E
 Select only D & E
 Select only D
 Select all of them

If all investment alternatives are mutually exclusive and the MARR is 12%, which alternative should be
chosen?

 Select B
 Select E
 Select D
 Do nothing

If all investment alternatives are mutually exclusive and the MARR is 25%, which alternative should be
chosen?

 Select B, D, E
 Select only D & E
 Select only D
 Select none of them