Comprehensive Examination: Comparison and
Selection among Alternatives Engineering
Economics – Chapter 6
SECTION A: MULTIPLE CHOICE (45 Questions)
1. The process of choosing among competing alternatives based on economic analysis is called:
a) Controlling
b) Planning
c) Decision making
d) Performance evaluation
Correct Answer: c) Decision making
Rationale: Decision making is the systematic process of selecting among competing alternatives. In
engineering economics, this involves evaluating options based on economic criteria to identify the most
financially beneficial choice .
2. Which of the following is NOT a fundamental technique for cash flow analysis in engineering
economics?
a) Present Worth (PW)
b) Annual Worth (AW)
c) Return on Assets (ROA)
d) Internal Rate of Return (IRR)
Correct Answer: c) Return on Assets (ROA)
Rationale: The five fundamental techniques for cash flow analysis are Present Worth (PW), Annual Worth
(AW), Future Worth (FW), Internal Rate of Return (IRR), and External Rate of Return (ERR). ROA is an
accounting ratio, not a cash flow analysis technique for project comparison .
,3. What does "mutually exclusive" mean when referring to project alternatives?
a) All alternatives can be selected simultaneously
b) Selecting one alternative precludes selecting any other alternative
c) Alternatives must have identical cash flows
d) Alternatives must have the same useful life
Correct Answer: b) Selecting one alternative precludes selecting any other alternative
Rationale: Mutual exclusion refers to a situation in which choosing one option prevents choosing any
other option. This is fundamental to capital budgeting decisions where only one project can be selected
from a set of viable alternatives .
4. The minimum acceptable rate of return on invested capital is known as the:
a) Internal Rate of Return (IRR)
b) Discounted Cash Flow (DCF)
c) Minimum Attractive Rate of Return (MARR)
d) Opportunity Cost Rate (OCR)
Correct Answer: c) Minimum Attractive Rate of Return (MARR)
Rationale: MARR represents the minimum rate of return that a company is willing to accept on its
invested capital. It serves as the benchmark against which investment alternatives are evaluated .
5. According to Principle 2 (focus on differences), which alternative should be chosen as the base for
comparison?
a) The alternative with the highest initial investment
b) The alternative with the longest useful life
c) The alternative requiring the least amount of capital that yields satisfactory results
d) The alternative with the highest annual revenue
Correct Answer: c) The alternative requiring the least amount of capital that yields satisfactory
results
Rationale: The alternative that requires the least capital and yields satisfactory functional results should
be chosen as the base, unless the additional capital associated with larger investments can be justified
through incremental benefits .
, 6. What question forms the central focus when comparing alternatives with different investment
levels?
a) Which alternative has the lowest initial cost?
b) Do the added benefits from a more expensive alternative bring a positive return relative to added
costs?
c) Which alternative has the longest useful life?
d) What is the payback period for each alternative?
Correct Answer: b) Do the added benefits from a more expensive alternative bring a positive
return relative to added costs?
Rationale: This is the fundamental question in comparing mutually exclusive alternatives. The analysis
determines whether incremental investment generates returns that meet or exceed the MARR .
7. The length of time chosen for comparing mutually exclusive options is called the:
a) Payback period
b) Amortization period
c) Study period (planning horizon)
d) Depreciation period
Correct Answer: c) Study period (planning horizon)
Rationale: The study period or planning horizon is the time frame selected for the purpose of comparing
mutually exclusive options. It may be influenced by required service period, useful lives of alternatives,
and business policy .
8. Which assumption requires that alternatives are evaluated over a study period equal to a common
multiple of their respective lifespans?
a) Coterminated assumption
b) Repeatability assumption
c) Perpetuity assumption
d) Continuity assumption
Correct Answer: b) Repeatability assumption
Rationale: The repeatability assumption has two requirements: (1) evaluation over a study period equal
to a common multiple of respective lifespans or infinite period, and (2) economic effects will be repeated
in subsequent life spans .
Selection among Alternatives Engineering
Economics – Chapter 6
SECTION A: MULTIPLE CHOICE (45 Questions)
1. The process of choosing among competing alternatives based on economic analysis is called:
a) Controlling
b) Planning
c) Decision making
d) Performance evaluation
Correct Answer: c) Decision making
Rationale: Decision making is the systematic process of selecting among competing alternatives. In
engineering economics, this involves evaluating options based on economic criteria to identify the most
financially beneficial choice .
2. Which of the following is NOT a fundamental technique for cash flow analysis in engineering
economics?
a) Present Worth (PW)
b) Annual Worth (AW)
c) Return on Assets (ROA)
d) Internal Rate of Return (IRR)
Correct Answer: c) Return on Assets (ROA)
Rationale: The five fundamental techniques for cash flow analysis are Present Worth (PW), Annual Worth
(AW), Future Worth (FW), Internal Rate of Return (IRR), and External Rate of Return (ERR). ROA is an
accounting ratio, not a cash flow analysis technique for project comparison .
,3. What does "mutually exclusive" mean when referring to project alternatives?
a) All alternatives can be selected simultaneously
b) Selecting one alternative precludes selecting any other alternative
c) Alternatives must have identical cash flows
d) Alternatives must have the same useful life
Correct Answer: b) Selecting one alternative precludes selecting any other alternative
Rationale: Mutual exclusion refers to a situation in which choosing one option prevents choosing any
other option. This is fundamental to capital budgeting decisions where only one project can be selected
from a set of viable alternatives .
4. The minimum acceptable rate of return on invested capital is known as the:
a) Internal Rate of Return (IRR)
b) Discounted Cash Flow (DCF)
c) Minimum Attractive Rate of Return (MARR)
d) Opportunity Cost Rate (OCR)
Correct Answer: c) Minimum Attractive Rate of Return (MARR)
Rationale: MARR represents the minimum rate of return that a company is willing to accept on its
invested capital. It serves as the benchmark against which investment alternatives are evaluated .
5. According to Principle 2 (focus on differences), which alternative should be chosen as the base for
comparison?
a) The alternative with the highest initial investment
b) The alternative with the longest useful life
c) The alternative requiring the least amount of capital that yields satisfactory results
d) The alternative with the highest annual revenue
Correct Answer: c) The alternative requiring the least amount of capital that yields satisfactory
results
Rationale: The alternative that requires the least capital and yields satisfactory functional results should
be chosen as the base, unless the additional capital associated with larger investments can be justified
through incremental benefits .
, 6. What question forms the central focus when comparing alternatives with different investment
levels?
a) Which alternative has the lowest initial cost?
b) Do the added benefits from a more expensive alternative bring a positive return relative to added
costs?
c) Which alternative has the longest useful life?
d) What is the payback period for each alternative?
Correct Answer: b) Do the added benefits from a more expensive alternative bring a positive
return relative to added costs?
Rationale: This is the fundamental question in comparing mutually exclusive alternatives. The analysis
determines whether incremental investment generates returns that meet or exceed the MARR .
7. The length of time chosen for comparing mutually exclusive options is called the:
a) Payback period
b) Amortization period
c) Study period (planning horizon)
d) Depreciation period
Correct Answer: c) Study period (planning horizon)
Rationale: The study period or planning horizon is the time frame selected for the purpose of comparing
mutually exclusive options. It may be influenced by required service period, useful lives of alternatives,
and business policy .
8. Which assumption requires that alternatives are evaluated over a study period equal to a common
multiple of their respective lifespans?
a) Coterminated assumption
b) Repeatability assumption
c) Perpetuity assumption
d) Continuity assumption
Correct Answer: b) Repeatability assumption
Rationale: The repeatability assumption has two requirements: (1) evaluation over a study period equal
to a common multiple of respective lifespans or infinite period, and (2) economic effects will be repeated
in subsequent life spans .
