Leland Blank,
Texas A&M University Anthony Tarquin,
University of Texas - El Paso

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, 5^{th} 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: