Basics of Engineering Economics

1. What is Engineering Economics?

a) Study of physics in engineering
b) Study of economic principles applied to engineering projects
c) Study of mathematics in engineering
d) Study of social sciences in engineering
Ans: b) Study of economic principles applied to engineering projects
2. Which of the following is a fundamental principle of Engineering Economics?
a) Time value of money
b) Random decision making
c) Ignoring opportunity costs
d) Not considering risks
Ans: a) Time value of money
3. Which cost is irrecoverable and should not influence future economic decisions?
a) Fixed cost
b) Sunk cost
c) Opportunity cost
d) Variable cost
Ans: b) Sunk cost
4. The opportunity cost is defined as:
a) The initial investment cost
b) The benefit of the next best alternative forgone
c) The depreciation cost of an asset
d) The overhead costs
Ans: b) The benefit of the next best alternative forgone
5. Which of the following is an example of a fixed cost?
a) Raw material costs
b) Electricity bill
c) Machinery purchase
d) Labor wages
Ans: c) Machinery purchase
6. A cost that varies with the level of output is called:
a) Fixed cost
b) Sunk cost
c) Variable cost
d) Overhead cost
Ans: c) Variable cost
7. Which of the following is not considered while computing the present worth of a
project?
a) Inflation rate
 b) Interest rate
c) Future cash flows
d) Market share
Ans: d) Market share
8. What is the formula for Present Worth (PW)?
a) PW = FV / (1 + i)^n
b) PW = FV × (1 + i)^n
c) PW = FV × (1 – i)^n
d) PW = FV / (1 – i)^n
Ans: a) PW = FV / (1 + i)^n
9. What does ‘i’ represent in financial formulas?
a) Inflation rate
b) Discount rate
c) Interest rate
d) Tax rate
Ans: c) Interest rate
10. Which of the following is NOT a method of economic evaluation?
a) Net Present Value (NPV)
b) Internal Rate of Return (IRR)
c) Payback Period
d) Torque Calculation
Ans: d) Torque Calculation

Time Value of Money

11. What does the time value of money imply?
a) Money has no value over time
b) A rupee today is worth more than a rupee in the future
c) A rupee today is worth less than a rupee in the future
d) Time and money are unrelated
Ans: b) A rupee today is worth more than a rupee in the future
12. If interest is compounded annually, what is the compound amount factor
formula?
a) (1 + i)^n
b) (1 – i)^n
c) (1 + ni)
d) (1 – ni)
Ans: a) (1 + i)^n
13. Which method calculates the present worth of future cash flows?
a) Future Value Method
b) Discounting Method
c) Accrual Accounting
 d) Depreciation Method
Ans: b) Discounting Method
14. Which type of interest is calculated only on the initial principal?
a) Simple interest
b) Compound interest
c) Nominal interest
d) Effective interest
Ans: a) Simple interest
15. What is the main advantage of compound interest over simple interest?
a) Lower interest accumulation
b) Faster increase in amount over time
c) Fixed growth rate
d) Less complexity in calculation
Ans: b) Faster increase in amount over time
16. What is the formula for simple interest?
a) SI = P × R × T
b) SI = P × R × T / 100
c) SI = P + R + T
d) SI = P × (1 + RT)
Ans: b) SI = P × R × T / 100
17. Which of the following is NOT a depreciation method?
a) Straight-line method
b) Declining balance method
c) Compound interest method
d) Sum of the years’ digits method
Ans: c) Compound interest method
18. The payback period of a project measures:
a) The time required to recover the initial investment
b) The total profit earned over a lifetime
c) The rate of return on investment
d) The future cash inflow
Ans: a) The time required to recover the initial investment
19. Which of the following best describes Net Present Value (NPV)?
a) The sum of future cash flows
b) The present worth of future cash flows minus the initial investment
c) The total future earnings of a project
d) The difference between total revenue and total cost
Ans: b) The present worth of future cash flows minus the initial investment
20. What does a positive NPV indicate?
a) The project should be rejected
 b) The project is financially viable
c) The project will incur losses
d) The investment has already been recovered
Ans: b) The project is financially viable

Interest Rates and Investment Analysis

21. What is the future value of ₹1,000 at an annual interest rate of 10%
compounded annually for 2 years?
a) ₹1,100
b) ₹1,200
c) ₹1,210
d) ₹1,250
Ans: c) ₹1,210
22. Which method is most commonly used for comparing mutually exclusive
projects?
a) Net Present Value (NPV)
b) Payback Period
c) Accounting Rate of Return (ARR)
d) Break-even Analysis
Ans: a) Net Present Value (NPV)
23. If the required rate of return increases, the present worth of future cash flows
will:
a) Increase
b) Decrease
c) Remain the same
d) Become zero
Ans: b) Decrease
24. The break-even point is where:
a) Total cost = Total revenue
b) Fixed cost = Variable cost
c) Profit is maximized
d) Net Present Value is zero
Ans: a) Total cost = Total revenue
25. Which of the following is NOT a criterion for selecting an investment project?
a) Internal Rate of Return (IRR)
b) Payback Period
c) Cost-Benefit Ratio
d) Torque Efficiency
Ans: d) Torque Efficiency
26. What happens when the discount rate is higher than the IRR?
a) The project is acceptable
 b) The project is rejected
c) The project has a zero NPV
d) The project reaches the break-even point
Ans: b) The project is rejected
27. Which economic analysis method does not consider the time value of money?
a) Net Present Value (NPV)
b) Internal Rate of Return (IRR)
c) Payback Period
d) Benefit-Cost Ratio
Ans: c) Payback Period
28. What is the main purpose of sensitivity analysis in engineering economics?
a) To calculate profits
b) To analyze how changes in input variables affect output
c) To ignore risks in decision-making
d) To determine labor costs
Ans: b) To analyze how changes in input variables affect output
29. Which of the following methods determines the interest rate at which NPV
becomes zero?
a) IRR
b) NPV
c) Payback Period
d) Cost-Benefit Analysis
Ans: a) IRR
30. Which statement is TRUE for an economically efficient project?
a) NPV < 0
b) IRR < Discount rate
c) Payback period is longer than the project life
d) NPV > 0
Ans: d) NPV > 0

Cost Concepts and Depreciation

31. Which of the following costs change with production levels?
a) Fixed cost
b) Variable cost
c) Sunk cost
d) Overhead cost
Ans: b) Variable cost
32. Which depreciation method provides equal depreciation every year?
a) Straight-line method
b) Declining balance method
c) Sum of years' digits method
 d) Double declining balance method
Ans: a) Straight-line method
33. What does "salvage value" refer to?
a) Initial cost of an asset
b) The value of an asset at the end of its useful life
c) The amount paid in taxes
d) The annual depreciation
Ans: b) The value of an asset at the end of its useful life
34. Which method results in higher depreciation expenses in the initial years?
a) Straight-line method
b) Double declining balance method
c) Unit of production method
d) Sum of years’ digits method
Ans: b) Double declining balance method
35. Which cost is recoverable when an asset is sold?
a) Sunk cost
b) Salvage value
c) Opportunity cost
d) Fixed cost
Ans: b) Salvage value
36. Which of the following is NOT a type of depreciation?
a) Straight-line method
b) Declining balance method
c) Inflation method
d) Sum of years’ digits method
Ans: c) Inflation method
37. Which factor is NOT considered in break-even analysis?
a) Fixed cost
b) Variable cost
c) Depreciation rate
d) Revenue per unit
Ans: c) Depreciation rate
38. Which formula is used to calculate depreciation using the straight-line method?
a) (Cost – Salvage Value) / Useful Life
b) (Cost × Rate of Depreciation)
c) (Cost + Salvage Value) / Useful Life
d) (Cost × Depreciation Rate × Time)
Ans: a) (Cost – Salvage Value) / Useful Life
39. Which cost is NOT included in the total production cost?
a) Direct material cost
 b) Labor cost
c) Selling price
d) Overhead cost
Ans: c) Selling price
40. What happens if depreciation is not accounted for?
a) Overstated profits
b) Understated profits
c) No impact on profits
d) Reduction in production costs
Ans: a) Overstated profits

Financial Decision Making & Case Studies

41. Which technique is used for investment decision-making?
a) Break-even Analysis
b) NPV
c) Material Costing
d) Sales Forecasting
Ans: b) NPV
42. What is the purpose of cost-benefit analysis?
a) To minimize production costs
b) To compare benefits and costs of a project
c) To increase labor efficiency
d) To determine tax liability
Ans: b) To compare benefits and costs of a project
43. What is the main difference between profit and cash flow?
a) Profit considers revenue and expenses, while cash flow considers actual cash
movement
b) Profit is always positive, but cash flow can be negative
c) Cash flow considers only expenses
d) Profit is calculated before interest payments
Ans: a) Profit considers revenue and expenses, while cash flow considers actual cash
movement
44. Which statement is TRUE regarding inflation?
a) Inflation decreases the real value of money over time
b) Inflation increases purchasing power
c) Inflation does not affect engineering economics
d) Inflation is always beneficial
Ans: a) Inflation decreases the real value of money over time
45. What is the purpose of risk analysis in engineering economics?
a) To ignore uncertainties
b) To evaluate the potential risks and their impact on decisions
c) To eliminate all possible risks
d) To increase production costs
Ans: b) To evaluate the potential risks and their impact on decisions