Time Value of Money: Master the Concept for Engineering Economics

Question 1

Why is the time value of money a crucial consideration in engineering economic analysis?

Accepted Answer

Because money available today is more valuable than the same amount of money in the future due to its potential to earn interest or be invested.

Answer

Because engineering projects often involve cash flows that occur at different points in time.

Answer

Because inflation decreases the purchasing power of money over time.

Answer

Because it is required by accounting standards.

Question 2

What is the future worth of a lump sum amount of money received today, considering the time value of money?

Accepted Answer

Future worth

Answer

Present worth

Answer

Annual worth

Answer

Equivalent worth

Question 3

What is a major advantage of considering the time value of money in engineering decision-making?

Accepted Answer

Allows comparison of alternatives with differing cash flow timings

Answer

Accounts for inflation and interest rate fluctuations

Answer

Simplifies the investment selection process

Answer

Reduces the risk of project failure

Question 4

A project with a negative net present value should be:

Accepted Answer

Rejected

Answer

Accepted

Answer

Postponed

Answer

Reconsidered

Question 5

Which of these is NOT a factor to consider when using the future worth method to assess an investment's attractiveness?

Accepted Answer

Inflation rate

Answer

Interest rate

Answer

Cash flow timing

Answer

Project life

Question 6

Which of the following factors has the most significant impact on the future value of money?

Accepted Answer

Interest rate

Answer

Time

Answer

Inflation

Answer

Initial investment

Question 7

Which of the following formulas is used to calculate the future worth (FV) of an investment?

Accepted Answer

FV = PV * (1 + r)^n

Answer

FV = PV / (1 + r)^n

Answer

FV = PV - (1 + r)^n

Answer

FV = PV + (1 + r)^n

Question 8

Which of the following fundamental principles states that money loses its worth over time?

Accepted Answer

Time Value of Money Principle

Answer

Present Value Principle

Answer

Future Value Principle

Answer

Depreciation Value Principle

Question 9

To calculate the present worth (PW) of a single amount (FV) that will be received in the future, which formula should be used?

Accepted Answer

PW = FV / (1 + i)^n

Answer

PW = FV * (1 + i)^n

Answer

PW = FV / (1 - i)^n

Answer

PW = FV * (1 - i)^n

Question 10

Which of the following is a significant benefit of using present worth analysis?

Accepted Answer

It takes into account the time value of money.

Answer

It allows for easy calculation.

Answer

It eliminates the need for risk assessment.

Answer

It can be applied to any type of project.

Question 11

Which formula correctly calculates the present worth (PW) of a future amount (F) that will be received after n years, with an interest rate (i)?

Accepted Answer

PW = F * (P/F, i%, n)

Answer

PW = F * (P/A, i%, n)

Answer

PW = A * (P/F, i%, n)

Answer

PW = A * (P/A, i%, n)

Question 12

Which measure of economic worth is used to determine the equivalent uniform annual benefits or costs of a project over its lifetime?

Accepted Answer

Annual worth

Answer

Present worth

Answer

Future worth

Answer

Net present value

Question 13

Which of the following factors does NOT influence the time value of money?

Accepted Answer

Project risk

Answer

Interest rate

Answer

Inflation

Answer

Time period

Question 14

A company plans to purchase a machine for $100,000 that will generate annual savings of $20,000 for 10 years. If the interest rate is 6%, what is the annual worth of the project?

Accepted Answer

$14,856

Answer

$13,889

Answer

$12,345

Answer

$10,000

Question 15

Which of the following is NOT a benefit of using the time value of money concept?

Accepted Answer

Elimination of all financial risks

Answer

Improved financial decision-making

Answer

More accurate evaluation of investments

Answer

Simplified cash flow analysis

Question 16

The time value of money principle asserts that money today is more valuable than the same amount in the future because:

Accepted Answer

All of the above are reasons.

Answer

Interest earned on investments can augment its worth over time.

Answer

Inflation erodes the purchasing power of money over time.

Answer

People prefer instant gratification to delayed rewards.

Question 17

Which of the following represents the formula for calculating the present worth of a single cash flow received at the end of a specified period?

Accepted Answer

P = F * PVF

Answer

P = F * AW

Answer

P = A * FW

Answer

P = A * PVF

Question 18

Which of the following is an advantage of utilizing the time value of money in financial decision-making?

Accepted Answer

It enables the comparison of projects with varying cash flows and timelines

Answer

It simplifies financial calculations

Answer

It eliminates the need for inflation adjustments

Question 19

Which of the following is the formula for calculating the present worth (PW) of a future cash flow in year n, given its future value (FV) and discount rate (r)?

Accepted Answer

PW = FV / (1 + r)^n

Answer

PW = FV * (1 + r)^n

Answer

PW = FV * r * n

Answer

PW = FV - r * n

Question 20

A company is considering purchasing a new machine that will generate annual cash flows of $10,000 for the next 10 years. If the annual worth (AW) of the project is $5,000, what is the maximum acceptable initial investment?

Accepted Answer

$50,000

Answer

$60,000

Answer

$40,000

Question 21

A project has a positive NPV at a discount rate of 10%. What does this indicate?

Accepted Answer

The project is considered financially viable.

Answer

The project has a negative internal rate of return.

Answer

The project should be rejected.

Answer

The project should be compared to other projects with a lower discount rate.

Question 22

Which of the following is the main assumption of the time value of money concept?

Accepted Answer

Money has different value at different points in time due to its earning potential.

Answer

Inflation has no impact on the time value of money.

Answer

The value of money remains constant over time.

Question 23

Which of the following is the formula for calculating the internal rate of return (IRR) of a project?

Accepted Answer

IRR = Discount rate that makes NPV = 0

Answer

IRR = EAW / PW

Answer

IRR = AW / PW

Answer

IRR = (FW - PW) / n

Question 24

If a company invests $10,000 today at an annual interest rate of 5%, what will the investment be worth after 10 years?

Accepted Answer

$16,288.95

Answer

$15,000.00

Answer

$18,000.00

Answer

$17,500.00

Question 25

A piece of equipment costs $20,000 and is expected to have a salvage value of $5,000 after 10 years.  Assuming an annual interest rate of 7%, what is the present worth of the salvage value?

Accepted Answer

$2,513.70

Answer

$5,000.00

Answer

$3,000.00

Answer

$4,000.00

Question 26

A company is considering two mutually exclusive projects. Project A has a present worth of $12,000 and Project B has a present worth of $14,000. Which project should the company choose based solely on present worth?

Accepted Answer

Project B

Answer

Neither project

Answer

Project A

Answer

More information is needed

Question 27

A construction project has an estimated cost of $1,000,000. The contractor offers a payment plan with a 20% down payment and the remaining balance due in equal annual installments over 5 years. If the annual interest rate is 10%, what is the amount of each annual payment?

Accepted Answer

$233,137.47

Answer

$300,000.00

Answer

$250,000.00

Answer

$200,000.00

Question 28

What is a key advantage of using the time value of money in financial decision-making?

Accepted Answer

It allows for the comparison of cash flows that occur at different points in time.

Answer

It eliminates the effects of inflation.

Answer

It guarantees a positive return on investment.

Question 29

What is the internal rate of return (IRR) of a project?

Accepted Answer

The discount rate that makes the net present value of the project equal to zero.

Answer

Always greater than the annual interest rate.

Answer

The same as the payback period.

Question 30

A company is considering investing $10,000 in a new machine that is expected to generate annual cash flow savings of $2,500 for the next 5 years. Assuming an interest rate of 8%, what is the present worth of this investment?

Accepted Answer

$9,818

Answer

$12,500

Answer

$10,000

Answer

$11,746

Question 31

Which of the following is a key concept of the time value of money?

Accepted Answer

The value of money decreases over time due to the effects of inflation.

Answer

Money cannot be compounded over time.

Answer

Time value of money is only applicable to large sums of money.

Answer

The future value of a present sum is always less than the present sum.

Question 32

If you invest $5,000 in an account with an annual interest rate of 5% compounded annually, how much will you have in the account after 10 years?

Accepted Answer

$7,777.06

Answer

$8,000

Answer

$5,500

Answer

$6,500

Question 33

A company is considering two investment projects with the following cash flows:
Project A: $10,000 initial investment, $3,000 annual cash flow for 5 years
Project B: $15,000 initial investment, $5,000 annual cash flow for 5 years
Assuming an interest rate of 10%, which project is preferable based on the net present value (NPV) method?

Accepted Answer

Project B

Answer

Project A

Answer

Cannot be determined from the information given.

Answer

Both projects have the same NPV.

Question 34

A company is considering two machines. Machine A costs $10,000 and has an estimated salvage value of $2,000 after 5 years. Machine B costs $12,000 and has an estimated salvage value of $3,000 after 8 years. Both machines are expected to generate the same annual cash flow of $5,000. Which machine is preferable based on the equivalent uniform annual cost (EUAC) method, assuming an interest rate of 10%? Use the capital recovery factor.

Accepted Answer

Machine A

Answer

Machine B

Answer

Cannot be determined from the information given.

Answer

Both machines have the same EUAC.