Economics, Project Management and Engineering Ethics
This domain tests capital and operating cost estimation, profitability analysis, project scheduling, and professional ethics. Questions require clear cash-flow logic and recognition of ethical conflicts in engineering decisions.
Core rules
- Capital cost estimates progress from order-of-magnitude to definitive. Factorial methods multiply equipment cost by installation factors; accuracy improves with engineering definition.
- NPV discounts all cash flows at the cost of capital. A positive NPV creates value. IRR is the discount rate at which NPV equals zero; it can be misleading for nonconventional cash flows.
- Payback ignores time value and cash flows after payback; use it as a screening measure, not a sole decision rule.
- Project schedules use critical-path logic. Crashing a noncritical activity does not shorten the project.
- Ethics requires disclosing conflicts of interest, protecting confidential data, and refusing to certify work outside competence.
Worked example
A project costs 1,000,000 now and generates net cash flow of 300,000 per year for 5 years. At 10%, the annuity factor is 3.791, so PV = 300,000 × 3.791 = 1,137,300. NPV = 1,137,300 - 1,000,000 = 137,300. The reasoning: discount the recurring cash flows as an annuity, then subtract the initial outlay. A positive NPV supports the project if the cash-flow assumptions and discount rate are sound.
Traps
Including sunk costs, comparing IRR without checking cash-flow pattern, crashing a noncritical task, and accepting an optimistic estimate without a contingency basis.