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Engineering Economics and Cost Analysis Questions and Answers

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RAMAPURAM

DEPARTMENT OF MECHANICAL ENGINEERING

Question Bank

Sub. Code/Name: MG 2451 Engineering Economics and Cost Analysis

Year/Sem: 4TH /VIII

UNIT I

Part - A

1. What is Engineering Economics?

Engineering economics is a science, which deals with the application of economic

theory in Engineering Practices. It is the study of allocation of resources available

to a firm among its activities.

2. State the Law of supply.

The law of supply sates that quantity supplied is positively related to price.

3. What do you mean by elasticity of supply?

Elasticity of supply is the degree of responsiveness of change in supply to change

in price of sellers.

4. State the Law of Demand.

According to Marshell, The amount demanded increases with a fall in price and

diminishes with a rise in price.

5. What is called Economic Efficiency?

It is the ratio of product per service worth to the input resource cost.

Product/ Service worth

Economic Efficiency=

Input Resource Cost

6. What are the elements of Cost?

The elements of cost are fixed costs and Variable cost.

7. What is called marginal cost?

Marginal Cost is the change in total cost as a consequence of adding one more

unit.

Increase in Total Cost

Marginal Cost=

Increase in Output

8. What is called Opportunity Cost?

Opportunity costs are the costs of displaced alternatives.

1

Sunk cost is one which is not affected by a change in the level or nature of

business activity. Ex. Depreciation.

10. What do you mean by margin of safety?

Margin of safety is the distance between the break even point and the output being

produced.

11. What is called breakeven point?

It is the intersection of the total cost line and the income line.

12. What is profit volume ratio?

Profit volume ratio measures the profitability in relation to sales.

Part - B

1.

2.

3.

4.

Explain the concept of Break Even Analysis.

Explain the steps involved in Process Planning.

A firm has a fixed cost of Rs. 9500, Selling Price per unit is Rs.5 and Variable

cost per unit is Rs. 3. Determine break even point in terms of volume and also

sales value. Calculate the margin of safety considering that the actual production

is 7500 units.

5. The following figures relate to a small manufacturing company:

Sales (Rs) : 700000

Variable (Rs): 450000

Fixed Cost(Rs): 50000

Calculate: 1) BEP

2) P/V Ratio.

UNIT II

PART - A

1. What do you mean by Value Analysis?

Value Analysis is the systematic identification and elimination of unnecessary,

unessential costs.

2. List out the types of Value.

Esteem value, use value, Cost value and Exchange value.

3. What is called Esteem Value?

The features or qualities which makes the ownership of the product desirable

or which increases the sales appeal.

4. State any two benefits of Value Analysis.

It develops logical and analytical approach to solve problems.

It promotes creativity, quality awareness, positive attitude amongst the

employee.

5. What is called effective interest rate?

The equivalent interest rate for any period other than a year is called effective

interest rate.

Effective interest rate = (1+i/C)c-1

6. What is single payment present worth factor?

Single future sum that will be received after n periods at an interest rate of i

compounded at the end of every interest period.

F

P=

(1+i)n

where, F- Future worth, P-Present worth, i- interest rate.

7. What is called equal payment series sinking fund?

The equivalent amount that should be deposited at the end of every interest

periods to realize the future sum at the end of nth period at the interest rate of i.

8. Define Uniform series Annual equivalent amount.

The annual equivalent amount of a series with an amount A1 at the end of the first

year and with an equal increment (G) at the end of each following n-1 years with

an interest rate of I compounded annually.

PART - B

1. A person wishes to have a future sum of Rs. 3,00,000 for his sons education after

15 years from now. What is the single payment that he should deposit now so that

he gets the desired amount after 15 years? The bank gives 15% interest rate

compounded annually.

2. Pradeepa is planning for his retied life. She plans to invest an equal sum of Rs.

30,000 at the end of every year for the next 30 years starting from the end of next

year. Bank gives 20% interest rate. Find the maturity amount of her account after

30 years.

3. A company has to replace a present facility after 20 years at an outlay of Rs.

8,00,000. It plans to deposit an equal amount at the end of every year for the next

15 years at an interest rate of 20%. Find the equivalent amount that must be

deposited at the end of every year for the next year.

4. A bank gives a loan to a company to purchase equipment Rs. 20,00,000 at an

interest rate of 18% annually. This amount should be repaid in 15 yearly equal

installments. Find the installment amount that the company has to pay to the bank.

5. A person is planning for his retired life. He would like to deposit Rs. 9000 at the

end of first year and there after he wishes to deposit the amount with an annual

decrease of Rs. 500 for the next 12 years with an interest rate of 15%. Find the

total amount at the end of 20th year of above series.

UNIT III

PART - A

1. What do you mean by present worth method?

Cash flow of each alternative will be reduced to time zero by assuming an interest

rate i. Then the best alternative will be selected by comparing the present worth

amounts of the alternatives, depending on the type of decisions.

2. What s called future worth method?

The future worth of various alternatives will be computed and then the alternative

with the maximum future worth of net revenue or the minimum future worth of

net cost will be selected.

3. What is called rate of return method?

The rate of return of a cash flow pattern is the interest rate at which the present

worth of that cash flow pattern decreases to zero. The alternative with highest rate

of return is chosen as the best alternative.

4. Define annual equivalent method?

The annual equivalent cost or revenue of each alternative is found, and then the

alternative with maximum annual equivalent revenue or minimum annual

equivalent cost will be chosen as the best alternative.

5. State revenue dominated cash flow?

The profit, revenue, salvage value (all in flow to an organization) will be assigned

positive sign. The costs (outflows) will be assigned with negative sign.

6. State Cost dominated cash flow?

The costs (outflows) will be assigned with positive sign. The profit, revenue,

salvage value (all in flow to an organization) will be assigned negative sign.

PART - B

1. An construction company has two bids for an elevator to be installed in a new

building. The details of the bids for the elevators are as follows:

Engineers Estimates

Initial Cost

Service

Annual Operations

Bid

(Rs.)

Life (Years)

Maintenance Cost

Guru Elevator Inc.

6,50,000

15

25,000

Prakash Elevator Inc.

9,30,000

15

30,000

comparison assuming 25% interest rate, compounded annually.

2. A finance company advertises two investment plans. In plan A, the company pays

Rs. 20,000 after 10 years for every Rs. 1000 invested now in plan B, for every

Rs. 1000 invested, the company pays Rs. 5,000 at end of 5 th year and Rs. 5,000 at

end of 10th year-select the best investment plan form the investors point of view

at i = 13% compounded annually.

3. Consider the following two mutually exclusive alternatives

Alternatives

End of Year

A (Rs)

- 40,00,00025,00,000

25,00,000

25,00,000

B (Rs)

50,00,000

17,00,000

17,00,000

17,00,000

25,00,000

17,00,000

4. A company is planning to purchase on advance machine under. Three original

manufacturers have responded to its tendes whose particulars are tabulated as:

Down

Yearly Equal

Number of

Manufactures

Payment (Rs.)

Installment (Rs.)

Installments

1

15,00,000

14,00,000

10

2

13,00,000

12,00,000

10

3

15,00,000

12,50,000

10

Determine the best alternative base don annual equivalent method by assuming i =

18%

5. A company must decide whether to buy machine X or Y.

Machine X

Initial cost (Rs.)

4,00,000

Useful life (Year)

5

Salvage value at end of m/c life

2,00,000

Annual maintenance (Rs.)

35,000

At 15% interest rate, which machines should be purchased?

Machine Y

6,00,000

5

20,00,000

0

UNIT IV

PART - A

1. List out the types of maintenance.

Maintenance may be classified as

(i)

Corrective or breakdown maintenance

(ii)

Scheduled maintenance

(iii)

Preventive maintenance and

(iv)

Predictive maintenance

2. State the disadvantages of breakdown maintenance.

1. Increased chances of accidents

2. Reduction of output

3. Deterioration of plant

4. Direct loss of profit

3. List out the objectives of Preventive Maintenance.

1. To minimize the possibility of unanticipated breakdown of machinery.

2. To maintain the optimum productive efficiency.

3. To reduce the work content of maintenance jobs.

4. To achieve maximum production at minimum repair cost.

4. What do you mean by overhaul?

A comprehensive examination and restoration of a facility to an acceptable

standard.

5. What is called availability?

Period for which a facility is in usable state.

6. State the reasons for replacement.

(a) Deterioration

(b) Obsolescence

(c) Inadequacy

(d) Working conditions

7. What is called economic life?

The point where the total cost (capital recovery cost and maintenance cost) is

minimum is called economic life of a machine.

8. What is called challenger and defender?

If an existing equipment is considered for replacement with the new equipment ,

then the existing equipment is known as the defender and the new equipment is

known as challenger.

PART - B

1. Two years ago, a CNC lathe was purchased at a cost of Rs. 2,50,000 to be useful

for eight years. Its salvage value at the end of its life is Rs. 25,000. The annual

maintenance cost is Rs. 25,000. The market value of the present machine is Rs.

1,50,000. Now, a new CNC lathe to cater to the needed of the present lathe is

available at Rs. 2,00,000 to be useful for six years. Its annual maintenance cost is

Rs. 14,000. The salvage value of the present lathe with the new lathe.

2. A petrol engine was installed 10 years ago at a cost of Rs. 75,000. It has a present

realizable market value of Rs. 25,000. If kept, it can be expected to last five years

more, with operating and maintenance cost of Rs. 15,000 per year and to have a

salvage value of Rs. 10,000 at the end of the fifth year. This engine can be

replaces with an improved version costing Rs. 90,000 which ahs an expected life

of 20 year. This improved version will have an estimated annual operating and

maintenance cost of Rs. 10,000 and ultimate salvage value of Rs. 15,000. Using

an interest tare of 15%, make an annual equivalent cost analysis to determine

whether to keep or replace the old engine.

3. The following table gives the operation cost, maintenance cost and salvage valve

at end of every year of M/C whose purchase value is Rs. 20,000

End of year

Operative Cost at Maintance Cost Salvage Value at End of

(n)

End of Year

at End of Year

Year

1

3,000

400

5,000

2

4,000

500

4,000

3

6,000

600

3,000

4

7,000

700

2,000

5

5,000

800

0

Interest rate = 15%

4. The following data are available for existing equipment and for proposed

equipment to replace the existing one. Find whether the concerns would go for

replacement or not.

Factors

Existing Equipment

Proposed One

a. Cost

Rs. 1500

Rs. 15000

b. Operating Expenses Rs. 5000

Rs. 48859

c. Scrap Value

Rs. 400

Rs. 80

d. Interest

10%

10%

e. Life Time

2 Years

5 Years

5. Given below is the data for two equipments. Find which alternative you will

choose.

Equipment I

Equipment 2

Initial Cost (P)

Rs. 10,000

Rs. 15,000

Annual Operating Cost

Rs. 5,000

Rs. 1,000

Life of Equipment

10 Years0

10 Years

8

Interest Rate (i) 5%

Rs. 2,000

Rs. 4,000

UNIT V

PART - A

1. Define depreciation.

Depreciation may be defined as the method of spreading the cost of a fixed asset

over the life or expected years of use of an asset.

2. List out the depreciation due to physical conditions.

(i) Wear and tear due to operating use

(ii) Action of elements like rust heat and decay.

(iii)

Disasters like accidents, earthquakes,

(iv) Poor maintenance

3. List out the method of calculating depreciation.

(i)

Straight-line method

(ii)

Diminishing balance method

(iii)

The sum of years digit method

(iv)

Sinking fund method

(v)

Depreciation by services.

4. Define inflation.

Inflation may be defined as a sustained rise in the general price level.

PART B

1. The state government of Goa is planning to construct a bridge across the river.

The estimated initial investment for constructing the bridge is Rs. 35,00,000. The

estimated life of the bridge is 15 years. The annual operation and maintenance

cost is Rs. 1,50,000. The value of fuel savings due to the construction of the

bridge is Rs. 5, 00,000 in the first year and it increases by 50,000 every year

thereafter till the end of the life of the bridge. Check whether the project is

justified based on BC ration by assuming an interest rate of 12% compounded

annually.

2. An engine lathe was purchased for Rs. 20,000 its useful life was 5 years and

salvage value of Rs. 10,000. Using the diminishing balance method, calculate the

depreciation ratio.

3. An engine lathe was purchased for Rs. 15,000 its useful life was10 years and

salvage of Rs. 5,000. Using diminishing balance method, estimate depreciation

fund at end of two years.

4. Estimate rate of depreciation from following data using sinking fund method.

Cost of machine Rs. 15,000

10

Interest at rate of 9% compound

Useful life of machine 10 Years.

5. Estimate the rate of depreciative using sinking fund method.

Cost of Machine Rs. 15,000

Scrap Value Rs. 11,000

Interest at rate of 8% compound

Life of Machine 5 Years.

11

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