Fundamentals of Engineering Economics

Business

Quiz 1 :

Engineering Economic Decisions

Quiz 1 :

Engineering Economic Decisions

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Which of the following statements is not one of the four fundamental principles of engineering economics? (a) Receiving a dollar today is worth more than a dollar received in the future. (b) To expect a higher return on investment, you need to take a higher risk. (c) Marginal revenue must exceed marginal cost to justify any production. (d) When you are comparing different alternatives, you must not focus only differences in alternatives.
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Fundamental principles of engineering economics:
a.It is a known factor that money has a time value associated with it in the form of compound interest rate. Hence, the statement of receiving a dollar today is worth more than a dollar received later is one of the fundamental principles of engineering economics.
b.Investors invest on securities with higher risk and volatility to receive a higher return over a time period. If the risk is avoided then the opportunity of earning higher return would also be given up. Hence, the statement of higher return is expected always with a higher risk is one of the fundamental principles of engineering economics.
c.As the availability of productive resources is limited in an economy to produce goods, the resources must be chosen effectively so as to maximize production. If the marginal revenue exceeds marginal cost, then the production will be more and it adds up to the total profit. While marginal cost exceeds marginal revenue, the more production subtracts from the total profit. Hence, the statement marginal revenue must exceed marginal cost is one of the fundamental principles of engineering economics.
d.While comparing a different alternative, such as cost and revenue with fixed or time variant of any project, often the salvage value is given up, which is most important for any particular project. Thus, the focus should also be given on the differences in the alternatives.
Hence, the option d is not one of the four fundamental principles of engineering economics.

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By reading any business publication give examples that illustrate one of the four fundamental principles of engineering economics.
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Illustration of fundamental principles of engineering economics:
Principle 1:
• Company S estimated the cost of building a bridge was $2.4 million in 2011 and it increased to $5million in 2014.
• Bank C offered 10 year saving policy where a deposit on today will double after 10 years.
This offer of bank C and estimation of company S states one of the fundamental principles of engineering economics that an earlier dollar is worth more than a later dollar.
Principle 2:
• Company H launched a new printing machine with low price. The printing quality of this machine is better than many other printers. But the processor of the printer is very slow.
The new launch of company H states one of the fundamental principles of engineering economics that is all that counts is the difference among alternatives.
Principle 3:
• Company NC acquired company MC last year. Now marginal revenue of company NC is $2million. Whereas, marginal cost is less than $1.5 million.
The above example states one of the fundamental principles of engineering economics that is marginal revenue must exceed marginal cost.
Principle 4:
• Bank ZC has opened a new office in New York zone. Since there is number of well-established bank in this zone, many analyst feels it is a risky decision. However, CEO of the bank is confident that the bank has implemented some new policy to attract customer, which will help the bank to survive in this region.
The above example states one of the fundamental principles of engineering economics that is additional risk is not taken without expected additional return.

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When evaluating a large-scale engineering project, which of the following items is important? (a) Expected profitability (b) Timing of cash flows (c) Degree of financial risk (d) All of the above
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Factors essential for evaluation of large scale engineering projects:
In a large scale engineering project, in order to analyze production method, engineering safety, environmental impacts, market assessment, an engineer evaluates expected profitability, timing of cash flow, and degree of financial risk.
Hence, option d is correct.

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Which of the following statements defines the discipline of engineering economics most closely? (a) Economic decisions made by engineers. (b) Economic decisions related to financial assets. (c) Economic decisions primarily for real assets and services from engineering projects. (d) Any economic decision related to the time value of money.
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Read the Wall Street Journal over a one-week period and identify the business investment news using one of the categories-(1) new products or product expansion, (2) equipment and process selection, (3) cost reduction, (4) equipment replacement, or (5) service or quality improvement.
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Which of the following statements is incorrect? (a) Economic decisions are time invariant. (b) Time and risk are the most important factors in any investment evaluation. (c) For a large-scale engineering project, engineers must consider the impact of the project on the company's financial statements. (d) One of the primary roles of engineers is to make capital expenditure decisions.
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