Question 1

Engineering Economy is a way to formulate, estimate and evaluate the economic

outcomes of different alternatives.

1) True
2) False
Question 2
Two factors are the defining aspects of any engineering economic decisions time and
the organization structure

1) True
2) False
Ch2
Question 3
If $400 is deposited in a savings account at the beginning of each of 15 years (there
are a total of 15 deposits) and the account draws interest at 8% per year compounded
annually, the value of the account at the end of 15 years will be most nearly

1) $12,668
2) $12,130
3) $11,730
4) $13,100
Question 4
A short-haul trucking company purchased a used dump truck for $12,000. The
company paid $5,000 down and financed the balance at an interest rate of 10% per
year for five years. The amount of its annual payment is nearest to:

1) $1,447
2) $1,846
3) $3,166
4) $4,346

Question 5
 A couple is planning to finance their 5 year old daughters college education. They
established a college fund that earns 10%, compounded annually. What annual deposit
must be made from the daughters 5th birthday (now) to her 16th birthday to meet the
future college expenses shown in the following table? Assume that today is her 5th
birthday.

1) C = $3,742
2) C = $1,978
3) C = $4,115
4) C = $3,048
Question 6
If a small company invests its annual profits of $150,000 in a stock fund which earns
18% per year, the amount in the fund after ten years will be nearest to:

1) $479,000
2) $785,000
3) $2,153,000
4) $3,528,000
Question 7
If you deposit $5,000 for one year on an account that earns 9% interest compounded
quarterly, how much would you cash at the end of that year.

1) $5,465.42
2) $7,057.91
3) $5,180
4) $5,450
Question 8
Two banks offer different interest rates on your deposit of $10,000 over 3 years. Bank
A offers an 8% interest compounded annually and Bank B offers an 8.5% simple annual
interest. Which of the following statements is true?
 1) You earn the same amount of interest over 3 years.
2) With Bank B, the total balance at the end of year 3 would be $12,773.
3) With Bank A you earn $47 more than with Bank B.
4) With Bank B you earn $150 more interest than with Bank A.
Question 9
If a company invests $25,000 in new packaging equipment, by how much must it
reduce its annual costs if it expects to recover the investment in seven years at an
interest rate of 10% per year?

1) $2,635
2) $5,135
3) $12,830
4) $48,718
Question 10
In solving from an unknown interest rate involving only the F/P formula, it is possible to
solve for i directly by rearranging the equation.

1) True
2) False
Question 11
A cash flow sequence is described by 1000 + 50k, where k is in years. The sequence
extends from year one through year eleven. The interest rate is 8% per year. The value
of G is:

1) $50
2) $100
3) $1000
4) $1050

Question 12
In order to update a production process, a company can spend money now or four
years from now. If the amount now would be $20,000, what equivalent amount could
the company spend four years from now at an interest rate of 10% per year?

1) $29,282
2) $35,620
3) $47,690
 4) $63,380
Question 13
How many years will it take for an investment to double itself if the interest rate is 8%
compounded annually?

1) 10.5 < N 11.5 years

2) 9.5 < N 10.5 years
3) 7.5 < N 8.5 years
4) 8.5 < N 9.5 years
Question 14

You borrowed $1,000 at 8%, compounded annually. The loan was repaid according to
the following schedule.

1) $345
2) $460
3) $108
4) $298

Question 15
Cash flow which changes by the same amount each interest period is called a:

1) Uniform cash flow.

2) Geometric series.
3) Uniform gradient.
4) Series cash flow.
Question 16
The equation that is used to calculate a present worth from a single future amount is:

1) P = F[1/(1+i)n]
2) P = F [((1+i)n-1)/i]
 3) P = F(1+i)n
4) P = F[1/(1+i)n-1/i((1+i)n)]
Question 17
How much do you need to invest in equal annual amounts for the next 10 years if you
want to withdraw $5,000 at the end of the eleventh year and increase the annual
withdrawal by $1,000 each year thereafter until year 25? The interest rate is 6%,
compounded annually.

1) $5,000
2) $20,000
3) $106,117
4) $8,054
Question 18
If you borrowed $800 for one month and you have to pay it back $860 at the end of the
month, the interest rate on the borrowed amount is

1) $60
2) $800
3) 7.5%
4) 14%
5) 3.25%

Question 19

What value of F3 would be equivalent to the payments shown in the cash flow diagram
below? Assume that the interest rate is 10%, compounded annually.

1) $488
2) $462
 3) $450
4) $457
Question 20

What is the present worth of the following income strings at an interest rate of 10%?
(All cash flows occur at year end.)

1) $43,923
2) $30,000
3) $37,741
4) $32,450

Question 21
By doing annual updating of a certain production line, a manufacturing company can
avoid spending $100,000 for a new system ten years from now. At an interest rate of
10% per year, the annual amount the company could afford to spend beginning one
year from now is nearest to:

1) $6,270
2) $16,270
3) $24,190
4) $38,550
Question 22
In the interest formulas, a simple interest can be used in any of the single payment
formulas as long as the n values correspond to the interest period.

1) True
2) False
Ch3
Question 23
A series of equal quarterly deposits of $1000 extends over a period of 3 years. What is
the future worth of this quarterly deposit series at 9% interest, compounded monthly?
 1) $13,112
2) $13,615
3) $12,590
4) $13,160
Question 24
A series of equal semi-annual payments of $1,000 for 3 years is equivalent to what
present amount at an interest rate of 12%, compounded annually? (All answers are
rounded to nearest dollars.)

1) $4,500
2) $5,401
3) $4,804
4) $4,944

Question 25
A building is priced at $100,000. If a down payment of $30,000 is made, and a
payment of $1,000 every month thereafter is required, how many months will it take to
pay for the building? Interest is charged at a rate of 12%, compounded monthly.

1) 132
2) 121
3) 100
4) 70
Question 26
Suppose you deposit $C at the end of each month for 10 years at an interest rate of
12%, compounded continuously. What equal end-of-year deposit over 10 years would
accumulate the same amount at the end of 10 years under the same interest
compounding?

1) A = C(F/A, 1.005%, 120) X (A/F, 12.68%, 10)

2) A = C(F/A, 1.005%, 12)
3) A = [C(F/A, 1%, 120)] X (A/F, 12%, 10)
4) A = [12C(F/A, 12.75%, 10)] X (A/F, 12.75%, 10)
Question 27
You are considering purchasing a piece of industrial equipment that costs $30,000. You
decide to make a down payment in the amount of $5,000 and to borrow the remainder
from a local bank at an interest rate of 9%, compounded monthly. The loan is to be
paid off in 36 monthly installments. What is the amount of the monthly payment?
 1) $954
2) $833
3) $795
4) $694
Question 28
John secured a home improvement loan from a local bank in the amount of $10,000 at
an interest rate of 9%, compounded monthly. He agreed to pay back the loan in 60
equal monthly installments. Immediately after the 24th payment, John decides to pay
off the remainder of the loan in a lump sum. What will be the size of this payment?

1) P = $6,528
2) P = $7,473
3) P = $6,000
4) P = $7,710
Question 29
Consider the following bank advertisement appearing in a local newspaper: Open a
Decatur National Bank Certificate of Deposit (CD), and you get a guaranteed rate of
return (effective annual yield) of 8.87%. If there are 365 compounding periods per
year, what is the nominal interest rate (annual percentage rate) for this CD?

1) 8.23%
2) 8.00%
3) 8.87%
4) 8.50%
Question 30
Assume you deposited $10,000 in a savings account that pays 6%, compounded
monthly interest. You wish to withdraw $200 at the end of each month. How many
months will it take to deplete the balance?

1) 57 < N < 60 months

2) 49 < N < 52 months
3) 53 < N < 56 months
4) N < 48 months
Question 31
A series of equal quarterly receipts of $1000 extends over a period of 5 years. What is
the present worth of this quarterly payment series at 8% interest, compounded
continuously?

1) $16,320
2) $16,351
3) $15,971
4) $18,345
Question 32
The effective interest rate with 10% interest rate compounded continuously over
quarterly payment period will equal

1) 2.5%
2) 2%
3) 10%
4) 2.53%
5) 1.58%

Ch4
Question 33
A proposed project that requires an investment of $10,000 (now) is expected to
generate a series of five equal payments ($6,000 each in constant dollars). Assume
that the average inflation rate is 4%, and the market interest rate (i) is 10% during this
inflationary period. What is the equivalent present worth of this investment?

1) $16,711
2) $15,434
3) $12,745
4) $15,274
Question 34
You are considering purchasing a $1,000 bond with a coupon rate of 9.5%, interest
payable annually. If the current inflation rate is 4% per year, which will continue in the
foreseeable future, what would be the real rate of return if you sold the bond at $1,080
after 2 years?

1) About 9.26%
2) About 13.26%
3) About 8.9%
4) About 9.5%
Question 35
Suppose that you borrow $20,000 at 12%, compounded monthly, over 5 years.
Knowing that the 12% represents the market interest rate, the monthly payment in
actual dollars will be $444.90. If the average monthly general inflation rate is expected
to be 0.5%, what is the equivalent equal monthly payment series in constant dollars?

1) $345
2) $486
3) $386
4) $445
Question 36
You are purchasing an automobile priced at $20,000 by borrowing at 12% interest
compounded monthly. The loan will be repaid in monthly installments for five years.
What is the constant dollar value (value at the time of financing) of the 36th payment
of this loan, if the general inflation rate is 5% compounded monthly?

1) $361.91
2) $444.89
3) $383.66

Question 37
$2,000 in Constant Dollar over 5 years with average inflation rate of 8% will be equal
to

1) $2,160.00
2) $2,800.00
3) $2,938.66
4) $10,874.23
5) $1,200
Question 38
A series of five constant dollar (or real-dollar) payments, beginning with $6,000 at the
end of the first year, are increasing at the rate of 5% per year. Assume that the
average general inflation rate is 4%, and the market interest rate is 11% during this
inflationary period. What is the equivalent present worth of the series?

1) $25,892
2) $24,259
3) $29,406
4) $27,211
Question 39
The CPI for 2000 was 171.2 and the projected CPI for 2008 is 220. What is the general
inflation rate over the last 8 years?

1) 3.65%
2) 3.18%
3) 2.83%
4) 6.1%
Question 40
If you experience a 6 % annual inflation, how long does it take to see the purchasing
power being reduced in half?

1) 13 years
2) 11 years
3) 12 years
4) 10 years