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Engineering Economics and Cost Analysis

# Engineering Economics and Cost Analysis

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12/01/2013

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# ENGINEERING ECONOMICS AND COST ANALYSIS – MG 1452 VIII SEMESTER – MECHANICAL ENGINEERING FORMULAE : UNIT – I

Profit Contribution Break Even Point in Quantity Break Even Point in Sales = = = = Sales – (Fixed Cost + Variable Cost) Sales – Variable Cost Fixed Cost / Contribution p.u. Fixed Cost x Selling price p.u. / Contribution p.u. Or Fixed Cost / Profit Volume Ratio Profit Volume Ratio (P/V ratio) = Margin of Safety (M.S.) = Contribution x 100 / Sales Actual Sales – Break Even Sales Or Profit x Sales / Contribution Or Profit / Profit Volume Ratio

UNIT – II
I.Single Payment Compound Amount – II.Single Payment Present Worth Method – F = P (F/P , i,n) P = F (P/F, i,n) or or F=P(1+I) P = F / (1 +i)

n

n

III.Equal Payment Series Compound Amount – F = A (F/A, i,n) IV.Equal Payment Series Sinking fund Amount – A = F (A/F, i,n)

or or

F = A x ((1 +i) n – 1 / i ) A = F x (i / (1+i)n – 1)

i.Equal Payment Series Capital Recovery Amount – A = P (A/P.n) if gradual decrease – A = A1 – G (A/G.Investment + A(P/A.n) A(F/A.i.i.i.n) or or A1 + ( G x ( (1+i)n – in – 1 / i(1+i)n – i) ) A1 – ( G x ( (1+i)n – in – 1 / i(1+i)n – i) ) then.n) + A(F/A.i.n) or A = P x ((i(1 + i)n / (1+i)n -1 ) VII.i.i.i.n) P (F/P.n) F(P/F.n) + A(F/A.i. => PW Annual Income / Annual Expenses Salvage amount – Future Income Future Worth Method = = – P (F/P.V.n) II.Equal Payment Series Present Worth Amount – P = A (P/A. To find out the future amount using average amount F = A ((1 +i)n – 1 / i ) VIII . i.i.n) => FW Investment Annual Income .n) – F(P/F.n) Investment + A(P/A.i.n) or P = A x ((1+i)n – 1 / i(1+i)n) VI.i.n) F = P (1 + r) N or F = P (1 + R)n UNIT III I. Present Worth Method = = . Uniform Gradient Series Annual Equivalent Amount : To find out average amount for the period if gradual increase – A = A1 + G (A/G.i.i.n) Revenue Dominated=> PW Cost Dominated A(P/A.i. Effective Interest Rate or A (F/A.n) – Salvage Amount Revenue Dominated=> FW Cost Dominated P (F/P.

Positive amount and the negative amount is required to find out the internal rate.i.i.i. of years .n) + Annual Expenses – F(A/F. n = no. Rate of Return Method = – Investment + A (P/A. i. n) + F x i + A P = Present Value. F = Salvage Amount. When. which gives more revenue.n) F(A/F.n) => AE Investment Salvage Amount IV.n) Only Revenue Dominated => PW A (P/A. Then.n) Revenue Dominated=> AE Cost Dominated P (A/P.n) Annual income To find out the internal rate of return. Lowest Assumed interest Rate Value of Lowest assumed Interest Sum of the value of lowest and highest assumed interest Rate of return I = + x Difference in lowest and highest Interest Rate Decision : Accept highest rate of interest. i.i. A = Annual Expenses . we need to assume interest rate.n) + Annual Income P (A/P.i. UNIT – IV Replacement Analysis AE = ( P – F) x (A/P. i. Annual Equivalent Method = = – P (A/P. i = Interest Rate .III. decrease in interest rate will give positive figure and when increase in interest rate will give negative figure.

i.n) (F/A. Sinking Fund Method Depreciation Dt Book Value Bt = = (P-F) ( A/F. Declining Balance Method / Reducing Balance Method Depreciation Dt Book Value Bt = = K (1 – K) x P t (1–K) x P t-1 III. Service Output Method Depreciation = (P – F) x used capacity / Total capacity Public Alternatives Benefit – Cost Ratio ( BC Ratio) = Bp / P + Cp Or Present Worth of benefits / Present Worth of Cost .n) P – (P-F) ( A/F.i.UNIT – V Depreciation: I. Straight Line Method Depreciation Dt Book Value Bt = = P-F / n P – ( t x P-F / n ) II. i.n) (F/P. Sum of the years digit method Depreciation Dt Book Value Bt = = n-t+1 x (P – F ) / n(n+1)/2 ((P-F ) x ( n-t) / n x n-t+1 / n+1 ) + F IV. i.n) V.

Labour. Use resources. 4. Cost of the inuts Technology Weather Prices of related goods . Flow of economy : Money payments for consumer goods and services Consumers goods. Factors influencing supply 1. Consume final goods and services 2. rents. Provide goods and services to customers 2. interest and profits Economic resources: Land. salaries. services Business 1. 3. Provide productive imputs to businesses Law of Supply and Demand: The aspect of the economy is that the demand and supply of a product are independent and they are sensitive with respect to the price of that product. inputs provided by households Money payments for resources. 2.THEORY UNIT – I Economics : It is the science that deals with the production and consumption of goods and services and the distribution and rendering of these for human welfare. Capital Households 1.

2. It established varied application systems based on different scientific principles. . 3. 3.Concept of Engineering Economics Engineering is the application of science. 4. Efficient and effective functioning of the organization would certainly help it to provide goods/services at a lower cost which in turn will enable to fix a lower price for its goods or services. 4. Prime Cost Factory Cost Cost of Production Cost of Sales = = = = Direct Mtls + Direct Labours + Direct expenses Prime cost + Indirect expenses Factory cost + Administrative exps Cost of production + Selling and Distribution expenses Other Cost / Revenues 1. Definition: Engineering economics deals with the methods that enable on to take economic decisions towards minimizing costs and maximizing benefits to the business organizations. 2. Marginal Cost Marginal Revenue Sunk Cost Opportunity Cost Break Even Analysis: The intersection point of the total slaes revenue line and total cost line is called the break even point. Types of Efficiency: Technical efficiency = Output x 100 / Input Worth x 100 / Cost Economic efficiency = Elements of Cost 1.

Create: Different alternatives. Value = Functions: 1. Value engineering is the application of exactly the same set of techniques to a new product at the design stage. Value Analysis vs Value Engineering Value analysis is the application of a set of techniques to an existing product with a view to improve its value. establish a monetary value for the function and provide the necessary function reliably at the lowest overall cost.UNIT – II Value Engineering Value analysis is the systematic application of recognized techniques which identify the function of a product or service. Blast: Identify the product. Refine: Develop the best alternative. Collect relevant information. Secondary function 3. Critically evaluate the alternatives 3. Define different function 2. Primary function 2. Tertiary function Value Engineering Procedures: 1. Implement the alternative Performance / Cost .

Reasons: a) Physical impairment of the various parts b) Obsolescence of the equipment Alternatives: a) Replacement of the existing equipment with a new one b) Augmenting the existing one with an additional equipment Types of Maintenance. BC ratio = Equivalent benefits / Equivalent Costs . Thus. then the existing equipment is known as the defender and the new equipment is known as challenger. UNIT – V Evaluation of Public alternatives: The main objective of the any public alternative is to provide goods/services to the public at the minimum cost. This is nothing but taking decision based on Benefit-Cost ratio (BC). the equipment will be obsolete over a period of time.UNIT –IV Replacement and Maintenance Analysis It is an absolute necessity to maintain the equipment in good operating conditions with economical cost. the organization needs an integrated approach to minimize the cost of maintenance. In certain cases. i) Preventive Maintenance ii) Breakdown Maintenance Types of Replacement i) Replacement of assets that deteriorate with time a) Determination of economic life of an asset b) Replacement of an existing asset with a new asset ii) Simple probabilistic model for assets which fail completely a) Individual replacement policy b) Group replacement policy Challenger and Defender If an existing equipment is considered for replacement with a new equipment.

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