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Engineering Economy, 5/e

Effects of Inflation

# Sample FE Exam Problems

How to use this section: This section includes questions and problems like those on a typical FE exam. For organization purposes only, they are presented in chapter order of the text Engineering Economy, 5th edition, by Blank and Tarquin.

It is recommended that you read through each question carefully.

 1 The minimum attractive rate of return for company X is 20% per year. If the company assumes the inflation rate is 8% per year, the interest rate it should use to account for inflation in a present worth calculation is nearest to: A) 20% B) 28% C) 29.6% D) 32.4% 2 A company negotiates an option contract wherein it has agreed to buy a piece of machinery sometime between now and five years from now. If the company buys the machinery now, the cost will be \$50,000. If the company buys the machinery at any time other than now, the cost will be increased by the inflation rate. If the company's minimum attractive rate of return is 12% per year and the inflation rate is 6% per year, the cost of the machinery 4 years from now would be closest to: A) \$56,291 B) \$63,124 C) \$78,675 D) \$99,326 3 An analyst conducting an economic analysis used an inflated interest rate of 16% per year in all calculations. If the real interest rate at the time of the calculations was 12% per year, the inflation rate was closest to: A) 3.57% B) 5.28% C) 8.36% D) 13.29% 4 An inflated interest rate of 24% per year at a time when the inflation rate is 10% per year implies that the company's real minimum attractive rate of return is closest to: A) 6% B) 6.28% C) 12% D) 12.73% 5 An inflated interest rate of 24% per year at a time when the inflation rate is 10% per year implies that the company's real minimum attractive rate of return is closest to: A) 10% B) 12.7% C) 14.8% D) 26.3% 6 A company purchased a semi-automatic assembly-line machine for \$100,000 five years ago. If the same machine costs \$150,000 today, when the market interest rate is 12% per year, the inflation rate over that time period was closest to (assume the cost of the machine increased by only the inflation rate): A) 4.6% B) 6.3% C) 7.1% D) 8.4% 7 The ENR Construction Cost Index was 3378.17 in 1980. If the index was 4770.03 in 1990, the annual increase in construction costs over that time period was closest to: A) 3.51% B) 4.63% C) 5.42% D) 6.88% 8 The first cost of a certain piece of machinery is \$60,000. The machine will be used for five years, after which time it will be salvaged for \$10,000. The machine's operating cost is expected to be \$20,000 per year. If the inflation rate is 4% per year and the company's minimum attractive real rate of return is 20% per year, the present worth of the machine is closest to: A) \$101,370 B) \$110,700 C) \$125,900 D) \$153,420 9 If a person deposits \$1,000 now into a savings account for 10 years, the amount of money required in year 10 to account for a 6% per year inflation and earn a real 8% per year interest rate is closest to: A) \$1,791 B) \$2,635 C) \$3,866 D) \$4,261 10 A certain machine will cost \$50,000 to purchase, will have a six-year life, and \$5,000 salvage value. It will be updated in year 4 at a cost of \$15,000. Its annual operating cost is expected to be \$30,000 per year. At an inflation rate of 5% per year and a real interest rate of 10% per year, the present worth of the machine is closest to: A) \$102,630 B) \$129,300 C) \$142,720 D) \$168,350