Mid Term Paper

Engineering Economics

Submitted By:
Name: CU-ID
Ayaz Ali Khan CU-348-2017

Submitted to:
Sir Abdul Majid Khan

Department of Mechanical Engineering CECOS

University of IT & Emerging Sciences
Question 01 (07+02 Marks) (CLO1, PLO1)
Identify different types of engineering cost? How
engineering costs helps in the decisions making process.
Answer # 1:
As we know that Engineer design and manufacture product in order to
make life easy for human beings and also to make money. Now for
engineer studying Engineering Economics is very important so today we
will have to know about different types of engineering cost.
Different types of engineering cost:
1) Fixed cost
2) Variable cost
3) Marginal cost
4) Total cost
5) Sunk cost
6) Opportunity cost
7) Cash cost
8) Recurring cost
9) Non recurring cost
Fixed cost:
It is the cost whose value does not change and is independent
of output in a firm.
For Example: cost of rent, instruments, machines, etc.
Variable cost:
It is the cost whose value change and is dependent on
output in the firm.
For example: cost of electricity bill, gas bill etc.
Marginal cost:
 Marginal cost is the variable cost associated with one
additional unit of output or activity
Total cost:
It is the sum of all the cost in the firm. For example, total
cost=fixed cost+variable cost.
Sunk cost:
A sunk cost is a past cost that cannot be changed and is therefore
irrelevant in engineering economic analysis
Opportunity cost:
An opportunity cost is the cost that is concerned with an opportunity that
is declined. For example after my BS mechanical degree I decide to go
for MS degree now here my opportunity cost is the cost of salary when
not to go for MS degree .
Cash cost:
A cash cost is actually a cash transaction, or cash flow. If a company
purchases anything for company that it is said to be cash cost
Recurring cost:
A recurring cost is one that occurs at regular intervals or when a firm
produces similar goods and services on a continuing basis
Non recurring cost
A nonrecurring cost is one that occurs at irregular intervals or when a
form does not produce similar goods.

How engineering costs helps in the decisions making

process:
As we know that Engineer design and manufacture product
in order to make life easy for human beings and also to make money.
Now for engineer studying Engineering Economics is very important
because it help us to know about how to calculate the present value of
the product and future value of the product. Now the question here is
how engineering costs helps in the decisions making process. So after
studying engineering cost an engineer know about different types of cost
like what are the cost that will be fixed and is one time investment for
example equipment’s or machinery for the firm. And what are variable
cost in the firm so after knowing different types of cost in the firm a
person can easy find out that should I do this business or not, will I make
money doing this business or not.
Also, an engineer must have to design a project or manufacture a project
that can be buy by common people if its too much costly and cannot be
buy by anyone than there is no point of designing the product so
knowing about engineering cost help us to predict the future value of the
design or product So that’s how engineering costs helps in the decisions
making process

Describe interest rate? What is difference between

“Simple” and “Compound” interest rate?
interest rate:
Interest rate is actually when you take loan from a friend or organization
than an organization charge you additional amount from you which is
over and above the amount, they have lent you. The amount you have
given to you as “loan” is the “principal” amount and the additional
money you have to pay after sometime on the loan is called the
“interest”.
For example, if someone gives you 100$ on loan for 1 year with a
10% interest rate, then after 12 months you will have to give him back
110$.
Difference between “Simple” and “Compound” interest rate.

Simple interest rate Compound interest rate

Interest that is earned only on the
original investment is called
simple interest rate
For example, if you borrow some
money from someone at the
interest rate of 10% and you will
have to pay the money or loan in
10 years than the interest will be
only on its original value.
Here the interest is constant
Compound interest is the Interest
earned on interest.
For example, if you borrow some
money from someone at the
interest rate of 10% and you will
have to pay the money or loan in
10 years than the interest will be
on the last interest.
Here interest is increasing

Calculate different types of costs in the following table:

Answer # 2-part A:
Calculate different types of costs in the following table:

Output Fixed Variable Total Average Marginal Average

cost cost cost fixed cost variable
Cost cost
0 300 0 300 - -
1 300 150 450 300 150 150
2 300 270 570 150 120 135
3 300 370 670 100 100 123.3333
4 300 480 780 75 110 120
5 300 600 900 60 120 120
6 300 740 1040 50 140 123.3333
7 300 900 1200 42.85714 160 128.5714
8 300 1090 1390 37.5 190 136.25
9 300 1340 1640 33.33333 250 148.8889

Answer # 2 part B:
Given that rate of interest is 5%, determine Simple and Compound
interest in the following table:
Year Principal Simple interest Compound
amount rate interest rate
1 100 105 105
2 105 110.25 115.7625
3 110.25 115.7625 127.6282
4 115.76 121.548 140.707
5 121.55 127.6275 155.132

Why we study Economics in Engineering? What steps

are involved in the decision-making process?
Elaborate with the help of an example.
Answer # 3-part a:
As we know that Engineer design and manufacture product in order to
make life easy for human beings and also to make money. Now for
engineer studying Engineering Economics is very important because of
the following reasons.
Reasons:
1) To know the present and future demand of the product.
2) To know about the different engineering cost.
3) Helps in the decision-making process.
4) To use the resources efficiently.
5) To know about the interest rate, incase if engineer take loan from
bank or any other source
Steps involved in the decision-making process:
Following are the main
steps that are involved in decision making process.
1. Develop the Alternatives
2. Focus on the Differences
3. Use a Consistent Viewpoint
4. Use a Common Unit of Measure
5. Consider All Relevant Criteria
6. Make Uncertainty Explicit
7. Revisit Your Decisions
Develop the Alternatives:
This is the step where we have to clearly identify
or define the problem that what actually is the problem. So we must
have to put high priority on this step because if we didn’t understand the
problem than its really hard to solve the problem. An Elbert Einstein
once said if I have one hour to solve the problem I will think 55 min
about the problem and 5 min about the solution.
For example, here let suppose we have to buy a phone so we have three
different brands
1) iPhone 2) Samsung 3) Huawei
so here we have to choose between these three.
Focus on the differences:
This is the step where we have to look or do
comparession on the basis of the differences instead on similarities. So
here the camera is best of iPhone than Samsung and Huawei.
Use a Consistent Viewpoint:
This is the step where viewpoint for the
particular decision be first defined and then used consistently in the
description, analysis and comparison of alternatives.
Use common units of measure:
This is the step where we have to make or
use the common units of measure that’s mean that if we are looking to
the battery of Samsung, iPhone and Huawei than its unit must need to be
same i.e. mAH .
Use all relevant criteria:
This is the step where we have to look on all
relevant criteria of Samsung, iPhone and Huawei for example its price,
its battery storage its camera etc.
Make uncertainty very explicit:
As we know that Dealing with
uncertainty is an important aspect of so for that we have to check
weather the parts of the iPhone, Samsung and Huawei is available in
market or not.
Review/Revisit your decisions:
This is the last step where we have to
finally decide that what model should I buy for example as of the above
details the iphone is best so we have to buy I phone
What are some of the important applications of
economics in the field engineering economics? What is
your take on the notion that resources are scarce?
Answer # 3 part B:
Important applications of economics in the field engineering
economics:
Following are some important applications of economics in the field
engineering economics.
1) To know the present and future demand of the product. For
example here because of economics we can find out the project
instruments or mahine cost its today value and its value after some
period of time.
2) To know about the different engineering cost. For example fixed
cost, variable cost, total cost, apportunity cost etc in the field
3) Helps in the decision making process. For example engineering
economics help us to decide efficiently in our project
4) To use the resources efficiently for example in final year project
we first have to select the project so in this case we have unlimited
want while the resources are limited so it help engineering
economics help us to use the resources efficiently.
5) To know about the interest rate incase if engineer take loan from
bank or any other source
What is your take on the notion that resources are scarce:
As we
know that we human beings have unlimited needs and wants while the
resoures are limited.
So here we have three types of resouces
1) Land
2) Labour
3) Capital
Now our aim and engineer aim or goal is to use these resouces as
efficiently as possible and make or create those things that are most
needed by human beings.