ENGINEERING ECONOMICS 2026 – COST
ANALYSIS & INVESTMENT DECISION VERIFIED
EXAM GUIDE
Q1. What is the future value of $1,000 invested at 10% per year for 3 years (simple interest)?
A. $1,300
B. $1,331
C. $1,100
D. $1,210
CORRECT ANSWER: A. $1,300 RATIONALE: Simple interest = P × r × t = 1000 ×
0.10 × 3 = $300. FV = 1000 + 300 = $1,300.
Q2. What is the future value of $1,000 compounded annually at 10% for 3 years?
A. $1,300
B. $1,310
C. $1,331
D. $1,320
CORRECT ANSWER: C. $1,331 RATIONALE: FV = P(1 + r)ⁿ = 1000(1.10)³ = 1000 ×
1.331 = $1,331.
Q3. The present value of $5,000 due in 4 years at 8% per year is:
A. $3,675.15
B. $3,402.92
C. $4,629.63
D. $3,500.00
CORRECT ANSWER: A. $3,675.15 RATIONALE: PV = FV / (1 + r)ⁿ = 5000 / (1.08)⁴ =
.3605 ≈ $3,675.15.
,Q4. Which of the following best defines the time value of money?
A. Money loses value due to inflation only
B. A dollar today is worth more than a dollar in the future
C. Interest rates determine investment returns exclusively
D. Future money is always worth more than present money
CORRECT ANSWER: B. A dollar today is worth more than a dollar in the
future RATIONALE: The time value of money principle states that money available now
is worth more than the same amount in the future due to its earning potential.
Q5. What is the present worth factor also called?
A. Capital recovery factor
B. Compound amount factor
C. Present value interest factor
D. Sinking fund factor
CORRECT ANSWER: C. Present value interest factor RATIONALE: The present
worth factor (P/F, i%, n) is commonly known as the present value interest factor used to
discount future amounts to present value.
Q6. If $2,000 is deposited into an account earning 6% compounded semi-annually, what is the
effective annual interest rate?
A. 6.00%
B. 6.09%
C. 6.14%
D. 6.18%
CORRECT ANSWER: B. 6.09% RATIONALE: EAR = (1 + r/m)^m − 1 = (1 + 0.06/2)²
− 1 = (1.03)² − 1 = 1.0609 − 1 = 6.09%.
,Q7. A uniform series of $500 payments made at the end of each year for 5 years at 8%
interest. What is the present value?
A. $1,996.35
B. $2,500.00
C. $2,166.67
D. $1,848.85
CORRECT ANSWER: A. $1,996.35 RATIONALE: PV = A × [(1 − (1+i)^-n)/i] = 500 ×
[(1 − (1.08)^-5)/0.08] = 500 × 3.9927 ≈ $1,996.35.
Q8. What is the capital recovery factor (A/P, i%, n) used to calculate?
A. The present value of an annuity
B. The future value of a lump sum
C. The equivalent annual payment from a present sum
D. The sinking fund deposit
CORRECT ANSWER: C. The equivalent annual payment from a present
sum RATIONALE: The capital recovery factor converts a present amount into an
equivalent uniform annual series over n periods at interest rate i.
Q9. A nominal interest rate of 12% compounded monthly gives an effective annual rate of
approximately:
A. 12.00%
B. 12.36%
C. 12.68%
D. 12.75%
CORRECT ANSWER: C. 12.68% RATIONALE: EAR = (1 + 0.12/12)^12 − 1 =
(1.01)^12 − 1 ≈ 1.1268 − 1 = 12.68%.
, Q10. What does the sinking fund factor (A/F, i%, n) compute?
A. Present value of an annuity
B. Annual deposit needed to accumulate a future sum
C. Future value of a lump sum
D. Monthly payment for a loan
CORRECT ANSWER: B. Annual deposit needed to accumulate a future
sum RATIONALE: The sinking fund factor determines how much must be deposited each
period to accumulate a desired future amount.
Q11. What is the future value of an annuity of $1,000/year for 6 years at 7%?
A. $7,153.29
B. $6,000.00
C. $7,654.00
D. $8,102.50
CORRECT ANSWER: A. $7,153.29 RATIONALE: FV = A × [(1+i)^n − 1]/i = 1000 ×
[(1.07)^6 − 1]/0.07 = 1000 × 7.1533 ≈ $7,153.29.
Q12. The process of finding the present value of a future cash flow is called:
A. Compounding
B. Amortization
C. Discounting
D. Capitalization
CORRECT ANSWER: C. Discounting RATIONALE: Discounting is the reverse of
compounding — it reduces a future value to its equivalent present value using a discount rate.
Q13. Which factor converts a future single sum to a present value?
ANALYSIS & INVESTMENT DECISION VERIFIED
EXAM GUIDE
Q1. What is the future value of $1,000 invested at 10% per year for 3 years (simple interest)?
A. $1,300
B. $1,331
C. $1,100
D. $1,210
CORRECT ANSWER: A. $1,300 RATIONALE: Simple interest = P × r × t = 1000 ×
0.10 × 3 = $300. FV = 1000 + 300 = $1,300.
Q2. What is the future value of $1,000 compounded annually at 10% for 3 years?
A. $1,300
B. $1,310
C. $1,331
D. $1,320
CORRECT ANSWER: C. $1,331 RATIONALE: FV = P(1 + r)ⁿ = 1000(1.10)³ = 1000 ×
1.331 = $1,331.
Q3. The present value of $5,000 due in 4 years at 8% per year is:
A. $3,675.15
B. $3,402.92
C. $4,629.63
D. $3,500.00
CORRECT ANSWER: A. $3,675.15 RATIONALE: PV = FV / (1 + r)ⁿ = 5000 / (1.08)⁴ =
.3605 ≈ $3,675.15.
,Q4. Which of the following best defines the time value of money?
A. Money loses value due to inflation only
B. A dollar today is worth more than a dollar in the future
C. Interest rates determine investment returns exclusively
D. Future money is always worth more than present money
CORRECT ANSWER: B. A dollar today is worth more than a dollar in the
future RATIONALE: The time value of money principle states that money available now
is worth more than the same amount in the future due to its earning potential.
Q5. What is the present worth factor also called?
A. Capital recovery factor
B. Compound amount factor
C. Present value interest factor
D. Sinking fund factor
CORRECT ANSWER: C. Present value interest factor RATIONALE: The present
worth factor (P/F, i%, n) is commonly known as the present value interest factor used to
discount future amounts to present value.
Q6. If $2,000 is deposited into an account earning 6% compounded semi-annually, what is the
effective annual interest rate?
A. 6.00%
B. 6.09%
C. 6.14%
D. 6.18%
CORRECT ANSWER: B. 6.09% RATIONALE: EAR = (1 + r/m)^m − 1 = (1 + 0.06/2)²
− 1 = (1.03)² − 1 = 1.0609 − 1 = 6.09%.
,Q7. A uniform series of $500 payments made at the end of each year for 5 years at 8%
interest. What is the present value?
A. $1,996.35
B. $2,500.00
C. $2,166.67
D. $1,848.85
CORRECT ANSWER: A. $1,996.35 RATIONALE: PV = A × [(1 − (1+i)^-n)/i] = 500 ×
[(1 − (1.08)^-5)/0.08] = 500 × 3.9927 ≈ $1,996.35.
Q8. What is the capital recovery factor (A/P, i%, n) used to calculate?
A. The present value of an annuity
B. The future value of a lump sum
C. The equivalent annual payment from a present sum
D. The sinking fund deposit
CORRECT ANSWER: C. The equivalent annual payment from a present
sum RATIONALE: The capital recovery factor converts a present amount into an
equivalent uniform annual series over n periods at interest rate i.
Q9. A nominal interest rate of 12% compounded monthly gives an effective annual rate of
approximately:
A. 12.00%
B. 12.36%
C. 12.68%
D. 12.75%
CORRECT ANSWER: C. 12.68% RATIONALE: EAR = (1 + 0.12/12)^12 − 1 =
(1.01)^12 − 1 ≈ 1.1268 − 1 = 12.68%.
, Q10. What does the sinking fund factor (A/F, i%, n) compute?
A. Present value of an annuity
B. Annual deposit needed to accumulate a future sum
C. Future value of a lump sum
D. Monthly payment for a loan
CORRECT ANSWER: B. Annual deposit needed to accumulate a future
sum RATIONALE: The sinking fund factor determines how much must be deposited each
period to accumulate a desired future amount.
Q11. What is the future value of an annuity of $1,000/year for 6 years at 7%?
A. $7,153.29
B. $6,000.00
C. $7,654.00
D. $8,102.50
CORRECT ANSWER: A. $7,153.29 RATIONALE: FV = A × [(1+i)^n − 1]/i = 1000 ×
[(1.07)^6 − 1]/0.07 = 1000 × 7.1533 ≈ $7,153.29.
Q12. The process of finding the present value of a future cash flow is called:
A. Compounding
B. Amortization
C. Discounting
D. Capitalization
CORRECT ANSWER: C. Discounting RATIONALE: Discounting is the reverse of
compounding — it reduces a future value to its equivalent present value using a discount rate.
Q13. Which factor converts a future single sum to a present value?
