SRM VALLIAMMAI ENGINEERING COLLEGE

(An Autonomous Institution)

SRM Nagar, Kattankulathur – 603 203

DEPARTMENT OF MECHANICAL ENGINEERING

QUESTION BANK

VIII SEMESTER

MG6863 – ENGINEERING ECONOMICS

Regulation – 2013

Academic Year 2019 - 2020

Prepared by

Dr.M.Ganesan @ Kanagaraj – Asst. Professor/MBA

Mrs.A.Umadevi – Asst. Professor/MBA

Mr.VT. Baalaji Amuthan – Asst. Professor/MBA

 SRM VALLIAMMAI ENGINEERING COLLEGE
(An Autonomous Institution)
SRM Nagar Kattankulathur – 603 203.
DEPARTMENT OF MECHANICAL ENGINEERING
QUESTION BANK
SUBJECT : MG6863 – ENGINEERING ECONOMICS
SEM / YEAR : VIII SEMESTER / IV YEAR

UNIT – I – INTRODUCTION TO ECONOMICS

SYLLABUS: Introduction to Economics- Flow in an economy, Law of supply and demand, Concept of
Engineering Economics – Engineering efficiency, Economic efficiency, Scope of engineering economics -
Element of costs, Marginal cost, Marginal Revenue, Sunk cost, Opportunity cost, Break-even analysis - V
ratio, Elementary economic Analysis – Material selection for product Design selection for a product,
Process planning.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE

1 Define Economics. Level 1 Remembering

2 Compare law of supply and law of demand. Level 2 Understanding

3 Identify the four goals of economy. Level 3 Applying

4 Classify factors influencing supply curve. Level 4 Analysing

5 Discuss the concept of factors influencing demand. Level 5 Evaluating

Interpret your understanding on Engineering Efficiency and
6 Level 6 Creating
Economic efficiency.
Define Engineering Economics and write the need of studying
7 Level 1 Remembering
Economics for the Engineers.
8 Compare marginal cost and Total Cost. Level 2 Understanding

9 How would you estimate marginal revenue? Level 3 Applying

10 What is the outcome of process planning? Level 4 Analysing

11 Conclude your understanding of Margin of Safety. Level 5 Evaluating

12 Interpret P/V ratio to cost benefit analysis. Level 6 Creating

13 Define Sunk cost & Opportunity Cost. Level 1 Remembering

14 Compare law of Demand and Demand shift. Level 2 Understanding

15 How would show your understanding on Break-Even Chart? Level 3 Applying

16 Classify the steps in the process planning. Level 4 Analysing

17 Define the term demand and law of demand in economics. Level 1 Remembering

18 Classify the various elasticity of demand. Level 2 Understanding

19 Define marginal cost. Level 1 Remembering

 What is the P/V ratio when Marginal cost is Rs.2400, Selling price
20 Level 1 Remembering
is Rs.3,000

PART- B (13 Marks)

S.NO QUESTIONS BT LEVEL COMPETENCE
i) How would you describe the flow in an economy with (7)
1 diagram? Level 1 Remembering
ii) How would you describe an economy? (6)
i) How would you summarize the concept law of supply and (7)
2 demand with suitable example? Level 2 Understanding
ii) Explain the determinants of law of supply and demand. (6)
i) How would you show your understanding on breakeven (7)
3 point and it role in cost efficiency? Level 3 Applying
ii) Draw a break-even chart and discuss its components. (6)
Classify the various cost concepts. Establish the Cost-
4 (13) Level 4 Analysing
output relationship in the short-run with suitable diagram
i) Categorize the types of process planning. (7)
5 Level 5 Evaluating
ii) Discuss Process Planning /Process Modification. (6)
Evaluate the scope of engineering economics and its
6 (13) Level 6 Creating
Industrial application.
i) Write about Economics. (6)
7 ii) What is the process flow of goods, services, resources, (7) Level 1 Remembering
money payments in a simple economy?
Discuss in detail economics analysis for any engineering
8 project and write the process of material selection for (13) Level 2 Understanding
product design.
Demonstrate the various concepts of Engineering (13)
9 Level 3 Applying
Economics and analyze the concept of Efficiency.
List the factors affecting demand and supply. What are the (13)
10 Level 4 Analysing
consequences of these determinants?
What are the examples you can quote to explain the various (13)
11 Level 1 Remembering
elements of the cost.
Consider the following data of a company for the year
2017:
Sales = Rs. 1,20,000
Fixed cost = Rs. 25,000
12 Variable cost = Rs. 45,000 Find the following: (13) Level 2 Understanding
(a) Contribution
(b) Profit
(c) BEP
(d) M.S
Consider the following data of a company for the year 2017:
Sales = Rs. 80,000
Fixed cost = Rs. 15,000
Variable cost = 35,000
13 Find the following: (13) Level 4 Analysing
(a) Contribution
(b) Profit
(c) BEP
(d) M.S.
14 Krishna Company Ltd. has the following details: (13) Level 1 Remembering
Fixed cost = Rs. 40,00,000
 Variable cost per unit = Rs. 300
Selling price per unit = Rs. 500
Find
(a) The break-even sales quantity
(b) The break-even sales
(c) If the actual production quantity is 1,20,000, find the
following:
(d) Contribution
(e) Margin of safety

PART – C (15 Marks)

S.NO QUESTIONS
You have discussed with a coworker in the engineering department the importance of explicitly
1 defining the viewpoint (perspective) from which future outcomes of a course of action being
analyzed are to be developed. Explain what you mean by a viewpoint or perspective.
Assume that your employer is a manufacturing firm that produces several different electronic
2 consumer products. What are five nonmonetary factors (attributes) that may be important when a
significant change is considered in the design of the current best-selling product?
Will the increased use of automation increase the importance of engineering economy studies?
3
Why or why not?
List 10 typical situations in the operation of an organization where an engineering economic
analysis would significantly assist decision making. You may assume a specific type of
4 organization (e.g., Manufacturing firm, Medical health center and hospital, transportation
company, government agency) if it will assist in the development of your answer (state any
assumptions).

UNIT – II – VALUE ENGINEERING

SYLLABUS: (Make or buy decision, Value engineering – Function, aims, Value engineering procedure.
Interest formulae and their applications –Time value of money, Single payment compound amount factor,
Single payment present worth factor,)Equal payment series sinking fund factor, Equal payment series
payment Present worth factor- equal payment series capital recovery factor - Uniform gradient series
annual equivalent factor, Effective interest rate, Examples in all the methods.
PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE

1 Define value engineering. Level 1 Remembering

Describe the quantitative and qualitative factors to be considered
2 in “Make or Buy decision” Level 2 Understanding

3 Identify the aims of value engineering. Level 3 Applying

4 Conclude your understanding on usage of effective interest rate. Level 4 Analyzing

5 List the features of Value Engineering Level 5 Evaluating

6 Interpret the effective Interest Rate. Level 6 Creating

Describe the formula to obtain single-payment compound
7 amount. Level 1 Remembering

8 Explain Value analysis. Level 2 Understanding

A person wishes to have a future sum of Rs. 1,00,000 for his
son’s education after 10 years from now. What is the single-
9 payment that he should deposit now so that he gets the desired Level 3 Applying
amount after 10 years? The bank gives 15% interest rate
compounded annually

10 Conclude your understanding on the term time value of money. Level 4 Analysing

11 How do you apply the concept of is time value of money? Level 5 Evaluating

12 Interpret the reasons of applying value analysis approach. Level 6 Creating

13 Define Equal Payment Series. Level 1 Remembering

14 Explain any two value engineering procedures Level 2 Understanding

15 What example can you state for make or buy decision? Level 3 Applying

16 Classify the various types of equal payment series method. Level 4 Analysing

17 What is Capital Recovery Method? Level 1 Remembering

Outline about the sinking fund factor method in equal payment
18 series. Level 2 Understanding

19 Define present worth factor of single payment. Level 1 Remembering

20 Define investment decisions. Level 1 Remembering

PART- B (13 Marks)

S.NO QUESTIONS BT LEVEL COMPETENCE
1 i) How would you describe the various approaches used for (6) Level 1 Remembering
make or buy decision? (7)
ii) A Company has to replace an asset after 10yrs at an
outlay of Rs.5,00,000/-. It plans to deposit an equal amount
 at the end of every year for the next 10 years at an
annually compounded interest of 20%. Find the equivalent
amount to be deposited at the end of every year for the
next 10years.
i)Compare value analysis (VA)/ value engineering (VE).
(7)
2 ii)Explain the symptoms favouring the applications of Level 2 Understanding
VA/VE. (6)
How would you use value? What are the types of values
3 in value engineering with examples? (13) Level 3 Applying

i) Analyse the aims of value engineering.

(6)
4 ii) Categorize the advantages and application areas of (7) Level 4 Analysing
value engineering.
Discuss briefly explain the steps of value engineering with
5 a suitable example. (13) Level 5 Evaluating

(6)
i) Explain the time value of money.
6 (7) Level 6 Creating
ii) Prove practical applications of various interest formulas.
Explain the Single payment compound amount factor and
7 Single payment present worth factor in detail. Illustrate (13) Level 1 Remembering
your answer with examples.
Describe equal payment series compound amount and
8 equal payment series sinking fund with the help of cash (13) Level 2 Understanding
flow diagrams.
i) What are the various phases of value (6)
engineering?
ii) An engineer is considering two types of (7)
pressure sensors for a low pressure steam line.
The costs are shown below. How would you
make selection decision based on present worth
comparison at an interest rate of 16% per year?
Life 24 years.

9 Level 3 Applying
Particulars Type X Type Y
First Cost Rs.76,000 Rs.1,29,000
Maintenance cost Rs.12,000 Rs.9,000
(per year)
Salvage value Rs.0 Rs.20,000

i) What approach would you use while making

investment decisions? (6)
10 Level 4 Analysing
ii) Classify the various methods of time value of
money. (7)

11 i) Discuss the computation of future amount if a (7) Remembering

person deposits a sum of Rs.1,00,000 in a bank
 for his son’s education who will be admitted to
a professional course after 6 years. The bank
pays 15% interest rate compounded annually. Level 1
This happens at the time of admitting his son in
professional course.
ii) Interpret the various steps involved in value
engineering application. (6)

A company wants to set up a reserve which will help the

company to have an annual equivalent amount of
Rs.1000000 for the next 20 years towards its employee
12 welfare measures. The reserve is assumed to grow at the Level 2 Understanding
(13)
rate of 15% annually. Find the single payment that must
be made now as the reserve amount.
A company has extra capacity that can be used to produce
a sophisticated fixture which it has been buying for Rs.900
each. If the company makes the fixtures, it will incur
materials cost of Rs.300 per unit, labour costs of Rs.250
per unit, and variable overhead costs of Rs.100 per unit. (13)
13 Level 4 Analysing
The annual fixed cost associated with the unused capacity
is Rs.10,00,000. Demand over the next year is estimated
at 5000 units. Analyse and find out whether it Would be
profitable for the company to make the fixtures?
Define value analysis. Briefly explain the steps of value
14 engineering. (13) Level 1 Remembering

PART – C (15 Marks)

S.NO QUESTIONS
A company in the process industry produces a chemical compound that is sold to manufacturers
for use in the production of certain plastic products. The plant that produces the compound
1
employs approximately 300 people. Develop a list of six different cost elements that would be
fixed and a similar list of six cost elements that would be variable.
A person deposits a sum of Rs. 1,00,000 in a bank for his son’s education who will be admitted to
a professional course after 6 years. The bank pays 15% interest rate, compounded annually. Find
2
the future amount of the deposited money at the time of admitting his son in the professional
course.
A person needs a sum of Rs. 2,00,000 for his daughter’s marriage which will take place 15 years
3 from now. Find the amount of money that he should deposit now in a bank if the bank gives 18%
interest, compounded annually.
A company is planning to expand its business after 5 years from now. The expected money
required for the expansion programme is Rs. 5,00,00,000. The company can invest Rs. 50,00,000
at the end of every year for the next five years. If the assured rate of return of investment is 18%
4
for the company, check whether the accumulated sum in the account would be sufficient to meet
the fund for the expansion programme. If not, find the difference in amounts for which the
company should make some other arrangement after 5 years.

UNIT – III – CASH FLOW

SYLLABUS: Methods of Comparison of alternatives- Present worth method (Revenue dominated cash
flow diagram),-Future Worth method (Revenue dominated cash flow diagram, Cost dominated cash flow
diagram)-Annual equivalent method(Revenue dominated cash flow diagram, Cost dominated cash flow
diagram), Rate of Return method, Examples in all the methods.
 PART- A
S.NO QUESTIONS BT LEVEL COMPETENCE

1 Define present worth method. Level 1 Remembering

Compare the techniques involved for comparing the worthiness of
2 the project. Level 2 Understanding

3 How would you explain the concept of future worth? Level 3 Applying
Compare cash dominated cash flow diagram with future worth
4 method. Level 4 Analysing

5 Discuss the economic life of a project. Level 5 Evaluating

6 Interpret the applications of Rate of Return Method. Level 6 Creating

7 Define Annual equivalent method. Level 1 Remembering

8 Compare rate of return with cash flow method. Level 2 Understanding

How would you make use of Annual Equivalent method of
9 comparing alternatives? Level 3 Applying

10 Categorize the methods of revenue dominated cash flow. Level 4 Analysing

How will you make decisions in selection of alternatives in
11 economic analysis of investment? Level 5 Evaluating

12 Justify the formula used to calculate present value Level 6 Creating

Define Rate of Return Method. Write the formula to calculate
13 ROR. Level 1 Remembering

14 Explain cash dominated cash flow diagram. Level 2 Understanding

Consider the following two mutually exclusive alternatives.
Particulars Project A Project B
Cost Rs.4,000 Rs.6,000
15 Uniform Annual benefit Rs.640 Rs.960 Level 3 Applying
Useful life years 20 20
Using a 15% interest rate, determine which alternative should be
selected based on the future worth method of comparison.
Conclude your understanding on the concept of Compound
16 Interest. Level 4 Analysing

17 Define the term interest. Level 1 Remembering

18 Illustrate an example for annual equivalent method. Level 2 Understanding

19 What is Annual Equivalent method? Level 1 Remembering

20 State the potential sources of cash inflow over the project life. Level 1 Remembering
 PART- B (13 Marks)
BT
S.NO QUESTIONS COMPETENCE
LEVEL
How would you describe the revenue dominated cash flow and costs (13)
1 Level 1 Remembering
dominated cash flow of your own choice and explain its uses?
A company invests in one of the two mutually exclusive alternatives.
The life of both alternatives is estimated to be 5 years with the
following investment, annual returns & salvage values. Determine the
best alternative based on the annual equivalent method by assuming
i=25%.
Alternative
2 A B (13) Level 2 Understanding
Investment (Rs.) -1,50,000 -1,75,000
Annual Equal return (Rs.) 60,000 70,000
Salvage Value (Rs.) 15,000 35,000

Beta Industry is planning to expand its production operation. It has identified

three different technologies for meeting the goal. The initial outlay and
annual revenues with respect to each of the technologies are summarized
below. Suggest the best technology which is to be implemented based on the
present worth method of comparison assuming 20% interest rate,
compounded annually. The details are as follows:
Technology Initial Outlay Annual Life (13) Level 3
3 Revenue in Rs. (Years) Applying

1 12,00,000 4,00,000 10
2 2,0,00,000 6,00,000 10
3 18,00,000 5,00,000 10

Classify cost dominated cash flow diagram and explain the Annual
4 (13) Level 4 Analysing
Equivalent Method.
Consider the following two mutually exclusive alternatives: At i=18%
select the best alternative based on future worth method of
comparison.

5 (13) Level 5 Evaluating

End of Year
Alternativ 0 1 2 3 4
e
In Rupees
A 2500000 1000000 1000000 1000000 1000000
B 2250000 900000 900000 900000 900000

A company must decide whether to buy machine A or machine B. (13) Level 6

6 Creating
Particulars Machine A Machine B
 Initial Cost (Rs.) 3,00,000 6,00,000
Useful life (Years) 4 4
Salvage value at the end of 2,00,000 3,00,000
machine life (Rs.)
Annual Maintenance 30,000 0
At 15% interest rate which machine should be purchased?
Alpha industry is planning to expand its production operation. It has
identified three different technologies for meeting the goal. The initial
outlay and annual revenues with respect to each of the technologies are
summarized in the table. Suggest the best technology which is to be
implemented based on the present worth method of comparison assuming
7 20% interest rate compounded annually. (13) Level 1 Remembering
Particulars Initial Annual Life (In
Outlay Revenue Years)
Technology 1 12,00,000 4,00,000 10
Technology 2 20,00,000 6,00,000 10
Technology 3 18,00,000 5,00,000 10

Explain the concept of future worth method using revenue dominated

8 (13) Level 2 Understanding
cash flow diagram with Illustration.
i) Alpha Finance Company is coming with an option of (7)
accepting Rs.10000 now paying a sum of Rs.160000 after
20 years. Beta finance company is coming with a similar
option of accepting Rs.10000 now and paying a sum of
Rs.300000 after 25 years. Compare and select the best
alternative based on future worth method of comparison
with 15% interest rate compounded annually.
ii) Find the best alternative using the annual equivalent (6)
9 method of comparison. Assume an interest rate of 15% Level 3 Applying
compounded annually.

Alternative A B C
Initial cost 5,00,000 8,00,000 6,00,000
Annual receipt 2,00,000 1,50,000 12,00,000
Life (Years) 10 10 10
Salvage value 1,00,000 50,000 30,000

Compare and contrast the present worth method with future worth
10 (13) Level 4 Analysing
method
Compare the Annual Equivalent method with Rate of Return method
11 (13) Level 1 Remembering
With suitable example.
A company must decide whether to buy Machine A or Machine B.
Particulars Machine A Machine B
Initial Cost 4,00,000 8,00,000
Useful life (years) 5 5
12 Salvage value at the end 2,00,000 5,50,000 (13) Level 2 Understanding
of machine life (Rs.)
Annual Maintenance 40,000 0
At 15% interest rate which machine should be selected? (Use future
worth method of comparison)
Discuss about the different types of rate of return methods in (13)
13 Level 4 Analysing
Engineering decision making.
14 i) Discuss in detail about the different cash flow methods and (6) Level 1 Remembering
also give their formulas.
 ii) A firm is diversifying into a new business. The life of the (7)
business is 10 years without any salvage value at the end of
life. The initial outlay required is Rs.20,00,000/- and the
annual net profit estimated is Rs.3,50,000/-. Find the rate of
return for the new business. Check whether the business is
worth for a cost of capital of 12%.

PART – C (15 Marks)

S.NO QUESTIONS
A company has three proposals for expanding its business operations. The details are as follows:
Alternative Initial Cost (Rs.) Annual Revenue (Rs.) Life (Years)
A1 25,00,000 8,00,000 10
A2 20,00,000 6,00,000 10
1
A3 30,00,000 1,0,00,000 10
Each alternative has insignificant salvage value at the end of its life. Assuming an interest rate of
15%, compounded annually, find the best alternative for expanding the business operations of the
company using the annual equivalent method.
An automobile dealer has recently advertised for its new car. There are three alternatives of
purchasing the car which are explained below. Alternative 1 The customer can take delivery of a
car after making a down payment of Rs. 25,000. The remaining money should be paid in 36 equal
monthly installments of Rs. 10,000 each. Alternative 2 The customer can take delivery of the car
2 after making a down payment of Rs. 1,00,000. The remaining money should be paid in 36 equal
monthly installments of Rs. 7,000 each. Alternative 3 The customer can take delivery of the car by
making full payment of Rs. 3,00,000. Suggest the best alternative of buying the cars for the
customers by assuming an interest rate of 20% compounded annually. Use the annual equivalent
method
Consider the following cash flow of a project:
Year 0 1 2 3 4 5
3
Rs. -10,000 4000 4,500 5,000 5,500 6,000
Find the rate of return of the project.
A person invests a sum of Rs. 2,00,000 in a business and receives equal net revenue of Rs.
4 50,000 for the next 10 years. At the end of the 10th year, the salvage value of the business is Rs.
25,000. Find the rate of return of the business.

UNIT – IV – REPLACEMENT AND MAINTENANCE ANALYSIS

SYLLABUS: Replacement and Maintenance analysis-Types of maintenance, types of replacement
problem, determination of economic life of an asset, Replacement of an asset with a new asset-capital
recovery with return and concept of challenger and defender, Simple probabilistic model for items which
fail completely.
PART- A
BT
S.NO QUESTIONS COMPETENCE
LEVEL
1 What is Preventive Maintenance? Level 1 Remembering

2 Compare Recovery and Return. Level 2 Understanding

3 How do you understand the concept of Break down Maintenance? Level 3 Applying

4 List any two types of Maintenance Cost. Level 4 Analysing

 5 Discuss about the economic life of an asset. Level 5 Evaluating

6 Can you assess the importance of Replacement Policies? Level 6 Creating

7 What are the two types of Replacement problem? Level 1 Remembering

8 Summarize the concept of Rate of Return. Level 2 Understanding

9 How do you understand the concept of cash flow of a project? Level 3 Applying

10 List out the functional elements of maintenance programme. Level 4 Analysing

Can you write any two differences between replacement and
11 Level 5 Evaluating
maintenance?
Can you assess the any two disadvantages of Breakdown
12 Level 6 Creating
Maintenance?
13 What are the reasons for replacement? Level 1 Remembering

14 Distinguish between challengers and defenders. Level 2 Understanding

How would you show your understanding on maintenance in
15 Level 3 Applying
automobile?
16 Conclude your knowledge on Individual Maintenance cost. Level 4 Analysing

17 What is called availability in maintenance engineering? Level 1 Remembering

18 Compare Individual and Group Maintenance Cost. Level 2 Understanding

19 List the features of ‘economic life’ of equipment. Level 1 Remembering

20 Define Breakdown Maintenance. Level 1 Remembering

PART- B (13 Marks)

S.N BT
QUESTIONS COMPETENCE
O LEVEL
i)List any features of Maintenance. How would you manage (7)
1 maintenance in any sector? Level 1 Remembering
ii) List the causes for replacement of assets in detail. (6)
Find the comparative use value of the old machine. A machine was
purchased two years ago for Rs. 10,000. Its annual maintenance cost is
Rs.750. Its life is six years and its salvage value at the end of its life is
Rs.1, 000. Now, a company is offering a new machine at a cost of Rs.
10,000. Its life is four years and its salvage value at the end of its life is (13)
2 Level 2 Understanding
Rs.4, 000. The annual maintenance cost of the new machine is Rs. 500.
The company which is supplying the new machine is willing to take the
old machine for Rs. 8,000 if it is replaced by the new machine. Assume
an interest rate of 12%, compounded annually.
Is it advisable to replace the old machine?
 Show your understanding in finding the economic service life of an (13)
3 Level 3 Applying
asset and main causes of breakdown?
The following table gives the operation cost; maintenance cost and salvage
value at the end of every year of a machine whose purchase value is Rs.
20,000? Find the economic life of the machine assuming interest rate, i=15%.
End of Operation Maintenanc Salvage
Years (n) cost at the e cost at value at the
end of year the end of end of year
(Rs.) the year (Rs.)
(Rs.)
1 3000 300 9000 (13) Level 4
4 Analysing
2 4000 400 8000
3 5000 500 7000
4 6000 600 6000
5 7000 700 5000
6 8000 800 4000
7 9000 900 3000
8 10000 1000 2000
9 11000 1100 1000
10 12000 1200 0

i) Discuss about Simple probabilistic model for items which fail (7)
completely.
ii) Two years ago, a machine was purchased at a cost of Rs.2, 00,000 (6)
to be useful for eight years. Its salvage at the end of its life is Rs.25,
000. The annual maintenance cost is Rs. 1, 20,000. Now, a new
5 Level 5 Evaluating
machine to cater to the need of the present machine is available at Rs.
1, 50,000 to be useful for six years. Its annual maintenance cost is RS.
14,000. The salvage value of the new machine is RS. 20,000. Using an
interest rate of 12%, find whether it is worth replacing the present
machine with the new machine.
Determine the optimum replacement Policy. There are 10,000 bulbs in a
decorative set. When any bulb fails to be replaced, the cost of replacing a bulb
individually is Rs. 1 only. If all the bulbs are replaced at the same time, the cost
per bulb would be reduced to Rs. 0.35. The Percentage of bulbs surviving at
6 (13) Level 6 Creating
the end of Month (t) i.e. S (t) and the probability of failures during the month
(t) i.e. P (t) are given below.
t 0 1 2 3 4 5 6
S(t) 100 97 90 70 30 15 0
P(t) -- 0.03 0.07 0.20 0.40 0.15 0.15
With an illustration explain the need and the use of simple probabilistic
7 model for items which fail completely. And write in detail the mode of (13) Level 1 Remembering
recovery of capital and return.
8 Summarize about replacement and maintenance analysis. (13) Level 2 Understanding
Challenger and Defender: Two years ago, a machine was purchased at
a cost of Rs.2, 00,000 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, 20,000. Now, a
9 machine to cater to the need of the present machine is available at Rs. (13) Level 3 Applying
1, 50,000 to be useful for six years. Its annual maintenance cost is Rs.
14,000. The salvage value of the new machine is Rs. 20,000.
Using an interest rate of 12%, how would you find whether it is worth
replacing the present machine with the new machine?
 The data on the running cost per year and resale price of equipment ‘A’,
whose purchase price is Rs.2,00,000, are as follows.
Year 1 2 3 4 5 6 7
Runni 30000 38000 46000 58000 72000 90000 11000
ng 0
Cost
10 (Rs.) (13) Level 4 Analysing
Resal 10000 50000 25000 12000 8000 8000 8000
e 0
Value
Rs.

What is the optimum period of Replacement?

(7)
(i) What are the factors involved in determination of economic life of an
asset?
(6)
ii) Initial cost of a machine is Rs.6,00,000 with other details as below:
Determine the optimum period for replacement of the machine.
11 Year 1 2 3 4 5 Remembering
Resale Value 420000 300000 204000 144000 96500
(Rs.)
Cost of 1,40,000 160000 180000 210000 250000
labour (Rs.) Level 1
Illustrate annual equivalent total cost with suitable examples and state (13)
12 Level 2 Understanding
its limitations.
Can you identify the replacement problem and suggest your idea to (13)
13 Level 4 Analysing
Eradicate it.
(i)A firm is considering replacement of equipment, whose first cost is (7)
Rs. 4,000 and the scrap value is negligible at the end of any year.
Based on experience, it was found that the maintenance cost is zero
14 Level 1 Remembering
during the first year and it increases by Rs.200 every year thereafter.
When should the equipment be replaced if i =0%?
ii) When should the equipment be replaced if i=12%? (6)

PART – C (15 Marks)

S.NO QUESTIONS
A firm is considering replacement of equipment, whose first cost is Rs. 1,750 and the scrap value
is negligible at any year. Based on experience, it was found that the maintenance cost is zero
1 during the first year and it increases by Rs. 100 every year thereafter.
(a) When should the equipment be replaced if i = 0%?
(b) When should the equipment be replaced if i = 12%?
Three years back, a machine was purchased at a cost of Rs. 3,00,000 to be useful for 10 years.
Its salvage value at the end of its estimated life is Rs. 50,000. Its annual maintenance cost is Rs.
40,000. The market value of the present machine is Rs. 2,00,000. A new machine to cater to the
2
need of the present machine is available at Rs. 2,50,000 to be useful for 7 years. Its annual
maintenance cost is Rs. 14,000. The salvage value of the new machine is Rs. 20,000. Using an
interest rate of 15%, find whether it is worth replacing the present machine with the new one.
3 A diesel engine was installed 10 years ago at a cost of Rs. 50,000. It has a present realizable
market value of Rs. 15,000. If kept, it can be expected to last five years more, with operating and
maintenance cost of Rs. 14,000 per year and to have a salvage value of Rs. 8,000 at the end of
the fifth year. This engine can be replaced with an improved version costing Rs. 65,000 which has
 an expected life of 20 years. This improved version will have an estimated annual operating and
maintenance cost of Rs. 9,000 and ultimate salvage value of Rs. 13,000. Using an interest rate of
15%, make an annual equivalent cost analysis to determine whether to keep or replace the old
engine.
A steel highway bridge must either be reinforced or replaced. Reinforcement would cost Rs.
6,60,000 and would make the bridge fit for an additional five years of service. If it is reinforced, it
is estimated that its net salvage value would be Rs. 4,00,000 at the time it is retired from service.
The new prestressed concrete bridge would cost Rs. 15,00,000 and would meet the foreseeable
4 requirements of the next 40 years. Such a bridge would have no salvage value. It is estimated
that the annual maintenance cost of the reinforced bridge would exceed that of the concrete
bridge by Rs. 96,000. If the bridge is replaced by a new prestressed concrete bridge, the scrap
value of the steel would exceed the demolition cost by Rs. 4,20,000. Assume that the money
costs the state 10%. What would you recommend?

UNIT – V – DEPRECIATION
SYLLABUS: Depreciation – Introduction, Straight line method of depreciation, declining balance method
of depreciation – Sum of the years digits method of depreciation, sinking fund method of
depreciation/Annuity method of depreciation, service output method of depreciation – Evaluation of public
alternatives – introduction, Examples, inflation adjusted decisions –procedure to Adjust inflation,
Examples on comparison of alternatives and determination of economic life of asset.
PART- A
BT
S.NO QUESTIONS COMPETENCE
LEVEL
1 Recall the concept of Depreciation. Level 1 Remembering
Compare declining balance method of depreciation with double
2 Level 2 Understanding
declining balance method of depreciation
3 How would you use Straight line method of depreciation? Level 3 Applying

4 What do you think about Benefit cost ratio? Level 4 Analysing

5 Can you assess the merits of annuity method of depreciation? Level 5 Evaluating

6 Interpret sinking fund method of depreciation. Level 6 Creating

7 List the reasons for inflation. Level 1 Remembering

8 What is meant by Budget? Level 2 Understanding

9 Identify the various types of depreciation. Level 3 Applying

10 What do you think about the effect of inflation? Level 4 Analysing

11 Compile your view on Inflation Level 5 Evaluating

12 How would you evaluate the Book Value? Level 6 Creating

13 List any few objectives on Service output method of depreciation? Level 1 Remembering
Explain any two differences in evaluating alternatives of private and
14 Level 2 Understanding
public sector organizations.
15 Identify the causes of depreciation. Level 3 Applying

16 How would you apply the necessities of calculating depreciation? Level 4 Analysing

17 List the causes of deflation. Level 1 Remembering

Differentiate straight line method of depreciation and declining
18 Level 2 Understanding
balance method of depreciation.
19 Can you recall why do we provide depreciation on fixed assets? Level 1 Remembering
An asset has been purchased for Rs.10,000 and it will have a scrap
20 value of Rs.1,000 at the end of its useful life of 10 years. Calculate Level 1 Remembering
Depreciation.

PART- B (13 Marks)

BT
S.NO QUESTIONS COMPETENCE
LEVEL
State the meaning for the term depreciation fund and explain (13)
1 Level 1 Remembering
the various methods of depreciation.
2 Explain inflation adjusted decision. Sketch the procedure. (13) Level 2 Understanding
Himalaya Drug Company has just purchased a capsulating
machine for Rs. 10, 00,000. The plant engineer estimates that
the machine has a useful life of 5 years and a salvage value of
Rs. 10,000 at the end of its useful life. Compute the
3 Level 3 Applying
depreciation schedule for the machine by each of the following
depreciation methods :
(i) Straight line method of depreciation. (7)
(ii) Sum –of-the-year’s digits method of depreciation. (6)
With an example explain the straight line method of
4 depreciation. Also list the advantages of using straight line (13) Level 4 Analysing
method of depreciation
5 Explain the procedure to adjust inflation. (13) Level 5 Evaluating
6 How would you evaluate that in a particular locality of a state, (13) Level 6 Creating
the vehicle users take a roundabout route to reach certain
places because of the presence of a river? This results in
 excessive travel time and increased fuel cost. So, the state
governments planning to construct a bridge across the river.
The estimated initial investment for constructing the bridge is
Rs. 40, 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.
6, 00,000 in the first year and it increases by Rs. 50,000 every
year thereafter till the end of the life of the bridge. Check
whether the project is justified based on BC ratio by assuming
an interest rate of 12%, compounded annually.
(i)Define the difference in evaluating alternatives of private (6)
and public organizations.
(ii)A company has purchased equipment whose first cost is (7)
Rs. 1, 00,000 with an estimated life of eight years. The
7 Level 1 Remembering
estimated salvage value of the equipment at the end of its
lifetime is Rs. 20,000. Determine the depreciation charge and
book value at the end of the 5th year using the sum0f-the-
years-digits method of depreciation.
Explain the method of evaluation of public alternatives with (13)
8 Level 2 Understanding
special reference to inflation adjusted decision.
Robert &Co. Purchased Machinery on 1st April 2002 for Rs.
75,000. After having used it for three years it was sold for Rs.
35,000. Depreciation is to be provided every year at the rate of (13)
9 Level 3 Applying
10% per annum on declining balance method. Accounts are
closed on 31st March every year. Find out the profit or loss on
sale of machinery.
Two mutually exclusive projects are being considered for
investment.
Project A1 requires an initial outlay of Rs. 30, 00,000 with net
receipts estimated as Rs. 9, 00,000 per year for the next 5
10 years. The initial outlay for the project A2 is Rs. 60, 00,000, and(13) Level 4 Analysing
net receipts have been estimated at Rs. 15, 00,000 per year for
the next seven years. There is no salvage value associated
with either of the projects. Using the benefit cost ratio, which
project would you select? Assume an interest rate of 10%.
(i) A company is planning to start an employee welfare fund. It (7)
needs Rs. 50, 00,000 during the first year and it increases by
Rs. 5, 00,000 every year thereafter up to the end of the 5th
year. The above figures are in terms of today’s rupee value.
The annual average rate of inflation is 6% for the next five
years. The interest rate is 18%, compounded annually. Find the
single deposit which will provide the required series of fund
towards employees’ welfare scheme after taking the inflation
11 Remembering
rate into account.

(ii) The first coat of a road laying machine is Rs. 80, 00,000. Its (6)
salvage value after five years is Rs. 50,000. The length of road
that can be laid by the machine during its lifetime is 75,000 km.
In its third year of operation, the length of road laid is 2,000 km.
Find the depreciation of the equipment for that year using
Level 1
service output method of depreciation.
12 A state government is planning a hydroelectric project for a (13) Level 2 Understanding
river basin. In addition to the production of electric power, this
 project will provide flood control, irrigation and recreation
benefits. The estimated benefits and costs that are expected
to be derived from this project are as follows:
Initial cost = Rs. 8,00,00,000
Annual power sales =Rs. 60,00,000
Annual flood control savings = Rs. 30,00,000
Annual irrigation benefits =Rs. 50,00,000
Annual recreation benefits =Rs. 20,00,000
Annual operating and maintenance costs = Rs. 30,00,000
Life of the project = 50 years.
Check whether the state government should implement the
project (Assume i=12%)
On 1st Jan 2009, a company purchased a machine costing
Rs.5,00,000. Its estimated working life is 20 years at the end
of which it will fetch Rs.20,000. Additions are made on 1st jan
13 2010 and 1st July 2011 to the value of Rs.80,000 (scrap value (13) Level 4 Analysing
Rs.4000) and Rs.40,000(scrap value Rs.2,000) respectively.
The life of both the new machines is 20 years. Show machine
A/C for first four years.
(i)A machine is purchased for Rs. 45,000 and has a life of 20 (7)
years. Its salvage value is estimated to be Rs. 3,000. Using
the sum of years digits method, calculate annual depreciation
charges for first, sixth, and eleventh, sixteenth and twentieth
years.
14 (ii)Calculate the Depreciation, accumulated Depreciation and (6) Level 1 Remembering
book value for the following Data using Declined Balance
Method.
Initial Investment = Rs. 24,000
Salvage Value = Rs. 3,000
Time = 5 years

PART – C (15 Marks)

S.NO QUESTIONS
Consider the evaluation of the alternative of constructing a bridge across a river. List the different
1
benefits and costs related to this alternative.
In a particular locality of a state, presently, the vehicle users take a roundabout route to reach
certain places because of the presence of a river. This results in excessive time of travel and
increased fuel cost. So, the state government is planning to construct a bridge across the river.
The estimated initial investment for constructing the bridge is Rs. 40,00,000. The estimated life of
2
the bridge is 15 years. The annual operation and maintenance cost is Rs. 2,50,000. The value of
fuel savings due to the construction of the bridge is Rs. 6,00,000 in the first year and it increases
by Rs. 50,000 every year thereafter till the end of the life of the bridge. Check whether the project
is justified based on BC ratio by assuming an interest rate of 20%, compounded annually.
Two mutually exclusive projects are being considered for investment. Project A1 requires an initial
outlay of Rs. 50,00,000 with net receipts estimated to be Rs. 11,00,000 per year for the next eight
years. The initial outlay for the project A2 is Rs. 80,00,000, and net receipts have been estimated
3
at Rs. 20,00,000 per year for the next eight years. There is no salvage value associated with
either of the projects. Using the BC ratio, which project would you select? Assume an interest rate
of 15%.
4 A machine costs Rs. 7,00,000. Its annual operation cost during the first year is Rs. 60,000 and it
increases by Rs. 7,000 every year thereafter. The maintenance cost during the first year is Rs.
80,000 and it increases by Rs. 10,000 every year thereafter. The resale value of the machine is
Rs. 3,00,000 at the end of the first year and it decreases by Rs. 75,000 every year thereafter.
Assume an interest rate (discounting factor) of 20% and inflation of 5%, compounded yearly. Find
the inflation adjusted economic life of the machine.