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Engineering Economics: Why Money Today Beats Money Tomorrow

How engineers put a value on time and risk: compound interest, equivalence, present and annual worth, IRR, benefit-cost, depreciation, replacement, break-even and inflation.

Engineering Economics · 50 questions

Try 3 questions

1. At 8% interest compounded yearly, roughly how long does money take to double?

  1. About 16 years
  2. About 9 years
  3. About 12.5 years
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Answer: About 9 years

By the rule of 72, 72 divided by 8 gives about 9 years; 12.5 years would be doubling with simple interest.

2. Why does 1,000 at 10% compound interest grow to 1,210 after two years rather than 1,200?

  1. Inflation is added to the balance each year
  2. Year-two interest is also earned on year-one interest
  3. A bonus rate applies automatically in year two
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Answer: Year-two interest is also earned on year-one interest

Compounding pays interest on the accumulated balance, so the 100 earned in year one earns 10 more in year two.

3. A loan charges 1% interest per month, compounded monthly. Its effective annual rate is closest to what?

  1. Exactly 12%
  2. About 12.7%
  3. About 11.4%
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Answer: About 12.7%

1.01 raised to the 12th power is about 1.127, so monthly compounding adds roughly 0.7 points over the nominal 12%.

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