Part 2

Prepared
Dr. / Ibrahim Sabry
B.Sc.(Prod. Eng.),Dip.Tech.Sc.,M.Sc.,Ph.D.
Outline for courses

1. concept of engineering economics

2. Cash flow

3. Compound interest formula

4. Time value of money

5. Nominal and effective interest

6. Equivalence

7. Present worth value

8. Benefit/Cost ratio

9. Annual cost

10.Economic analysis of engineering alternative

11.Rate of return – Depreciation – Income taxes.

12.Break event analysis.

 Sheet 1 concept of engineering economics

1- Calculate the amount deposited 1 year ago to have $1000 now at an interest
rate of 5% per year. (b) Calculate the amount of interest earned during this
time period.
2- An employee at LaserKinetics.com borrows $10,000 on May 1 and must
repay a total of $10,700 exactly 1 year later. Determine the interest amount
and the interest rate paid.
3- Stereophonics, Inc., plans to borrow $20,000 from a bank for 1 year at 9%
interest for new recording equipment. (a) Compute the interest and the total
amount due after 1 year. (b) Construct a column graph that shows the original
loan amount and total amount due after 1 year used to compute the loan
interest rate of 9% per year.
4- An employee at LaserKinetics.com borrows $10,000 on May 1 and must
repay a total of $10,700 exactly 1 year later. Determine the interest amount
and the interest rate paid.
5- Today, Julie borrowed $5000 to purchase furniture for her new house. She
can repay the loan in either of the two ways described below. Determine the
engineering economy symbols and their value for each option. (a) Five equal
annual installments with interest based on 5% per year.(b) One payment 3
years from now with interest based on 7% per year.
6- Stereo Phonics, Inc., plans to borrow $ 20,000 from a bank for 1 year at 9
٪interest for new recording equipment. Compute the interest and the total
amount due after 1 year.
7- Last year Jane’s grandmother offered to put enough money into a savings
account to generate $5000 in interest this year to help pay Jane’s expenses at
college. (a) Identify the symbols, and (b) calculate the amount that had to be
deposited exactly 1 year ago to earn $5000 in interest now, if the rate of return
is 6% per year.
 Sheet 2:

1. Sandy, a manufacturing engineer, just received a year-end bonus of $10,000

that will be invested immediately. With the expectation of earning at the rate
of 8% per year, Sandy hopes to take the entire amount out in exactly 20 years
to pay for a family vacation when the oldest daughter is due to graduate from
college. Find the amount of funds that will be available in 20 years by using
(a) hand solution by applying the factor formula and tabulated value .
2. A father wants to deposit an unknown lump-sum amount into an investment
opportunity 2 years from now that is large enough to withdraw $4,000 per
year for state university tuition for 5 years starting 3 years from now. If the
rate of return is estimated to be 15.5% per year, draw the cash flow diagram
3. Each year Exxon-Mobil expends large amounts of funds for mechanical
safety features throughout its worldwide operations. Carla Ramos, a lead
engineer for Mexico and Central American operations, plans expenditures of
$1 million now and each of the next 4 years just for the improvement of fi
eld-based pressure-release valves. Construct the cash fl ow diagram to find
the equivalent value of these expenditures at the end of year 4, using a cost
of capital estimate for safety-related funds of 12% per year
4. An electrical engineer wants to deposit an amount P now such that she can
withdraw an equal annual amount of A 1 $2000 per year for the fi rst 5 years,
starting 1 year after the deposit, and a different annual withdrawal of A 2
$3000 per year for the following 3 years. How would the cash flow diagram
appear if i 8.5% per year?
5. A new college graduate has a job with Boeing Aerospace. She plans to
borrow 10,000 TL now to help in buying a car. She has arranged to repay the
entire principal plus 8% per year interest after 5 years. Draw a cash flow of
these transactions.
6. Manufacturers make backup batteries for computer systems available to
Batteries dealers through privately owned distributorships. In general,
batteries are stored throughout the year, and a 5% cost increase is added each
year to cover the inventory carrying charge for the distributorship owner.
Assume you own the City Center Batteries outlet. Make the calculations
necessary to show which of the following statements are true and which are
false about battery costs.
(a) The amount of $98 now is equivalent to a cost of $105.60 one year from
now.
(b) A truck battery cost of $200 one year ago is equivalent to $205
now.
(c) A $38 cost now is equivalent to $39.90 one year from now.
(d) A $3000 cost now is equivalent to $2887.14 one year earlier.
(e) The carrying charge accumulated in 1 year on an investment of $20,000
worth of batteries is $1000.
7. An electrical engineer wants to deposit an amount P now such that she can
withdraw an equal the annual amount of A1 $2000 per year for the first 5
years, starting 1 year after the deposit, and a different annual withdrawal of
A2 $3000 per year for the following 3 years. How would the cash-flow
diagram appear if i =8.5% per year?
 Sheet 3
1. Sandy, a manufacturing engineer, just received a year-end bonus of $10,000
that will be invested immediately. With the expectation of earning at the rate
of 8% per year, Sandy hopes to take the entire amount out in exactly 20 years
to pay for a family vacation when the oldest daughter is due to graduate from
college. Find the amount of funds that will be available in 20 years by using
(a) hand solution by applying the factor formula and tabulated value.
2. An engineer received a bonus of $12,000 that he will invest now. He wants
to calculate the equivalent value after 24 years, when he plans to use all the
resulting money as the down payment on an island vacation home. Assume
a rate of return of 8% per year for each of the 24 years. Find the amount he
can pay down, using the tabulated factor, the factor formula.
3. How much money should you be willing to pay now for a guaranteed $600
per year for 9 years starting next year, at a rate of return of 16% per year?
4. Formasa Plastics has major fabrication plants in Texas and Hong Kong. The
president wants to know the equivalent future worth of $1 million capital
investments each year for 8 years, starting 1 year from now. Formasa capital
earns at a rate of 14% per year.
5. How much money must an electrical contractor deposit every year in her
savings account starting 1 year from now at 5.5% per year in order to
accumulate $6000 seven years from now?
6. An engineer received a bonus of $12,000 that he will invest now.
He wants to calculate the equivalent value after 24 years, when he
plans to use all the resulting money as the down payment on an
island vacation home. Assume a rate of return of 10% per year for
each of the 24 years. Find the amount he can pay down, using the
tabulated factor, the factor formula, and a spreadsheet function.
7. Jamie has become more conscientious about paying off his credit
card bill promptly to reduce the amount of interest paid. He was
surprised to learn that he paid $400 in interest in 2007 and the
amounts shown in taple 1 over the previous several years. If he made
his payments to avoid interest charges, he would have these funds
plus earned interest available in the future. What is the equivalent
amount 5 years from now that Jamie could have available had he
not paid the interest penalties? Let i 5% per year.

Table 1
Year 2002 2003 2004 2005 2006 2007
Interest paid, $ 600 300 400
8. Hewlett-Packard has completed a study indicating that $50,000 in reduced
maintenance this year (i.e., year zero) on one processing line resulted from
improved wireless monitoring technology.
a. If Hewlett-Packard considers these types of savings worth 20% per year, find
the equivalent value of this result after 5 years.
b. If the $50,000 maintenance savings occurs now, find its equivalent value
3 years earlier with interest at 20% per year.

9. How much money should you be willing to pay now for a guaranteed $600
per year for 9 years starting next year, at a rate of return of 16% per year?
10. Formasa Plastics has major fabrication plants in Texas and Hon g Kong. The
president wants to know the equivalent future worth of $1 million capital
investments each year for 8 years, starting 1 year from now. Formasa capital
earns at a rate of 14% per year.
11. How much money must an electrical contractor deposit every year in her
savings account starting 1 year from now at 5.5% per year in order to
accumulate $6000 seven years from now?
12. The Highway Department expects the cost of maintenance for a piece of
heavy construction equipment to be $5000 in year 1, to be $5500 in year 2,
and to increase annually by $500 through year 10. At an interest rate of 10%
per year, determine the present worth of 10 years of maintenance costs.
13. A mechanical contractor has four employees whose combined salaries
through the end of this year are $250,000. If he expects to give an average
raise of 5% each year, calculate the present worth of the employees’ salaries
over the next 5 years. Let i=12% per year.
14. An engineering technology group just purchased new CAD software for
$5000 now and annual payments of $500 per year for 6 years starting 3 years
from now for annual upgrades. What is the present worth of the payments if
the interest rate is 8% per year?
15. Chemical engineers at a Coleman Industries plant in the Midwest have deter-
mined that a small amount of a newly available chemical additive will
increase the water repellency of Coleman’s tent fabric by 20%. The plant
superintendent has arranged to purchase the additive through a 5-year
contract at $7000 per year, starting 1 year from now. He expects the annual
price to increase by 12% per year starting in the sixth year and thereafter
through year 13. Additionally, an initial investment of $35,000 was made
now to prepare a site suitable for the contractor to deliver the additive. Use
i=15% per year to determine the equivalent total present worth for all these
cash flows.
 Sheet 5
1. National Homebuilders, Inc., plans to purchase new cut-and-finish
equipment. Two manufacturers offered the estimates below.
Vendor A Vendor
B
First cost, $ —15,000 —18,000
Annual M&O cost, $ per year —3,500 —3,100
Salvage value, $ 1,000 2,000
Life, years 6 9

(a) Determine which vendor should be selected on the basis of a present worth
comparison, if the MARR is 15% per year.
(b) National Homebuilders has a standard practice of evaluating all options
over a 5-year period. If a study period of 5 years is used and the salvage
values are not expected to change, which vendor should be selected?
2. A British food distribution conglomerate purchased a Canadian food
store chain for £75 mil- lion 3 years ago. There was a net loss of £10
million at the end of year 1 of ownership. Net cash flow is increasing
with an arithmetic gradient of £+5 million per year starting the second
year, and this pattern is expected to continue for the foreseeable future.
This means that breakeven net cash flow was achieved this year.
Because of the heavy debt financing used to purchase the Canadian
chain, the international board of directors expects a MARR of 25% per
year from any sale.
(a) The British conglomerate has just been offered £159.5 million by a
French company wishing to get a foothold in Canada. Use FW analysis to
determine if the MARR will be realized at this selling price.
(b) If the British conglomerate continues to own the chain, what selling price
must be ob- tained at the end of 5 years of ownership to just make the
MARR?
3. A university lab is a research contractor to NASA for in-space fuel cell
systems that are hydrogenand methanol based. During lab research,
three equal-service machines need to be evaluated economically.
Perform the present worth analysis with the costs shown below. The
MARR is 10% per year.
4. Luby’s Cafeterias is in the process of forming a separate business unit
that provides meals to facilities for the elderly, such as assisted care
and long-term care centers. Since the meals are prepared in one central
location and distributed by trucks throughout the city, the equipment
that keeps food and drink cold and hot is very important. Michele is
the general manager of this unit, and she wishes to choose between
two manufacturers of temperature retention units that are mobile and
easy to sterilize after each use. Use the cost estimates below to select
the more economic unit at a MARR of 8% per year
5. Find the present worth of the following cash flow diagram if i = 8 %.
6. Find the Annual worth of the following cash flow diagram if i = 12 %.
7. Find the present worth of the following cash flow diagram if i = 15 %.
8- Determine the PW, FW, and AW of the following engineering
project when the MARR is 15% per year

Investment cost $10,000

Expected life 5 years
Market (salvage)value -$1,000
Annual receipts $8,000
Annual expenses $4,000
 Sheet 6
1. Using a 10% interest rate, determine which alternative, if any, should be
selected, based on net present worth

Alternative
First Cost $5,300 $10,700
Uniform Annual Benefit 1,800 2,100
Useful life 4 years 8 years
2. Three purchase plans are available for a new car.
Plan A: $5,000 cash immediately
Plan B: $1,500 down and 36 monthly payments of $116.25
Plan C: $1,000 down and 48 monthly payments of $120.50
If a customer expects to keep the car five years and her cost of money is
18% compounded
monthly, which payment plan should she choose?
 3. Given the following three mutually exclusive alternatives
Alternative A B C
Initial Cost $50 $30 $40
Annual Benefits 15 10 12
Useful Life 5 5 5
What alternative is preferable, if any, assuming i = 10%?
4. Consider two investments:
1. Invest $1,000 and receive $110 at the end of each month for the next 10
months.
2. Invest $1,200 and receive $130 at the end of each month for the next 10
months.
If this were your money, and you want to earn at least 12% interest on your
money, which investment would you make, if any? Solve the problem by
annual cash flow analysis.
5. A farmer must purchase a tractor using a loan of $20,000. The bank
has offered the following choice of payment plans each determined
by using an interest rate of 8%. If the farmer's minimum attractive
rate of return (MARR) is 15%, which plan should he choose? Plan
A: $5,010 per year for 5 years Plan B: $2,956 per year for 4 years
plus $15,000 at end of 5 years, Plan C: Nothing for 2 years, then
$9,048 per year for 3 years
6. Projects A and B have first costs of $6,500 and $17,000, respectively. Project
A has net annual benefits of $2,000 during each year of its 5-year useful life,
after which it can be replaced identically. Project B has net annual benefits
of $3,000 during each year of its 10-year life. Use present worth analysis, and
an interest rate of 10% to determine which project to select.
7. A manufacturing firm has a minimum attractive rate of return (MARR) of
12% on new investments. What uniform annual benefit would Investment B
have to generate to make it preferable to Investment A?

Year Investment A Investment B

0 $60,000 $45,000
1-6 +15,000 ?

8. The city council wants the municipal engineer to evaluate three alternatives
for supplementing the city water supply. The first alternative is to continue
deep well pumping at an annual cost of $10,500. The second alternative is to
install an 18" pipeline from a surface reservoir. First cost is $25,000 and
annual pumping cost is $7000. The third alternative is to install a 24" pipeline
from the reservoir at a first cost of $34,000 and annual pumping cost of
$5000. Life of all alternatives is 20 years. For the second and third
alternatives, salvage value is 10% of first cost. With interest at 8%, which
alternative should the engineer recommend? Use present worth analysis.
9. An engineering analysis by net present worth (NPW) is to be made for the
purchase of two devices A and B. If an 8% interest rate is used, recommend
the device to be purchased.

Uniform
Cost Annual Benefit Salvage Useful Life

Device A $600 $100 $250 5 years

Device B 700 100 180 10 years
10. Two alternatives are being considered for recovering aluminum from
garbage. The first has a capital cost of $100,000, a first year maintenance cost
of $15,000, with maintenance increasing by $500 per year for each year after
the first. The second has a capital cost of $120,000, a first-year maintenance
cost of $3000, with maintenance increasing by $1,000 per year after the first.
Revenues from the sale of aluminum are $20,000 in the first year, increasing
$2,000 per year for each year after the first. Life of both alternatives is 10
years. There is no salvage value. The before-tax MARR is 10%. Using
present worth analysis, determine which alternative is preferred.
11. A brewing company is deciding between two used filling machines as a
temporary measure, before a plant expansion is approved and completed. The
two machines are: (a) The Kram Filler. Its initial cost is $85,000, and the
estimated annual maintenance is $8000. (b) The Zanni Filler. The purchase
price is $42,000, with annual maintenance costs of $8000. The Kram filler
has a higher efficiency, compared with the Zanni, and it is expected that the
savings will amount to $4000 per year if the Kram filler is installed. It is
anticipated that the filling machine will not be needed after 5 years, and at
that time, the salvage value for the Kram filler would be $25,000, while the
Zanni would have little or no value. Assuming a minimum attractive rate of
return (MARR) of 10%, which filling machine should be purchased?
12. Two technologies are currently available for the manufacture of an important
and expensive food and drug additive. The two can be described as follows:
Laboratory A is willing to release the exclusive right to manufacture the
additive in this country for $50,000 payable immediately, and a $40,000
payment each year for the next 10 years. The production costs are $1.23 per
unit of product. Laboratory B is also willing to release similar manufacturing
rights. They are asking for the following schedule of payments: On the
closing of the contract, $10,000 From years 1 to 5, at the end of each year, a
payment of $25,000 each From years 6 to 10, also at the end of each year, a
payment of $20,000. The production costs are $1.37 per unit of product.
Neither lab is to receive any money after 10 years for this contract. It is
anticipated there will be an annual production of 100,000 items for the next
10 years. On the basis of analyses and trials, the products of A and B are
practically identical in quality. Assuming a MARR of 12%, which lab should
be chosen?
13. A company decides it must provide repair service for the equipment it sells.
Based on the following, which alternative for providing repair service should
be selected?
Alternative NPW
A -$9,241
B -6,657
C -8,945
14. Be-low Mining INC. is trying to decide whether it should purchase or lease
new earth-moving equipment. If purchased, the equipment will cost
$175,000 and is expected to be used six years at which time it can be sold for
$72,000. At the midpoint of its life (year 3) an overhaul costing $20,000 must
be performed. The equipment can be leased for $30,000 per year. Be-low will
not be responsible for the mid-life over haul if the equipment is leased. If the
equipment is purchased it will be leased to other mining companies whenever
possible; this is expected to yield revenues of $15,000 per year. The annual
operating cost regardless of the decision will be approximately equal. What
would you recommend in the MARR is 6%?
 Sheet 7

1- One of the four ovens at a bakery is being considered for

replacement. Its salvage value and maintenance costs are given in the
table below for several years. A new oven costs $80,000 and this price
includes a complete guarantee of the maintenance costs for the first two
years, and it covers a good proportion of the maintenance costs for years
3 and 4. The salvage value and maintenance costs are also summarized
in the table.

Old Oven New Oven

Salvage Value Maintenance Salvage Value
Maintenance
Year at End of Year Costs at End of Year Costs
0 $20,000 $ - $80,000 $
1 17,000 9,500 75,000 0
2 14,000 9,600 70,000 0
3 11,000 9,700 66,000 1,000
4 7,000 9,800 62,000 3,000

Both the old and new ovens have similar productivities and energy
costs. Should the oven be replaced this year, if the MARR equals
10%?
2- The cash flow diagram below indicates the costs associated with
a piece of equipment. The investment cost is $5,000 and there is no
salvage. During the first 3 years the equipment is under warranty so there
are no maintenance costs. Then the estimated maintenance costs over 15
years follow the pattern shown in the cash flow diagram. Determine the
equivalent annual cost (EAC) for n = 12 if the minimum attractive rate
of return (MARR) = 15%. Use gradient and uniform series factors in your
solution.
3- A hospital is considering purchasing a new $40,000 diagnostic
machine that will have no salvage value after installation, as the cost of
removal equals any sale value. Maintenance is estimated to be $2,000
per year as long as the machine is owned. After ten years the radioactive
ion source will have caused sufficient damage to machine components
that safe operation is no longer possible and the machine must be
scrapped. The most economic life of this machine is
a. One year since it will have no salvage after installation.
b. Ten years because maintenance doesn’t increase.
c. Less than ten years but more information is needed to determine the economic
life.
4- A petroleum company, whose minimum attractive rate of return
is 10%, needs to paint the vessels and pipes in its refinery periodically to
prevent rust. “Tuff-Coat”, a durable paint, can be purchased for $8.05 a
gallon while “Quick-Cover”, a less durable paint, costs $3.25 a gallon.
The labor cost of applying a gallon of paint is $6.00. Both paints are
equally easy to apply and will cover the same area per gallon. Quick-
Cover is expected to last 5 years. How long must Tuff- Coat promise to
last to justify its use?
5- Ten years ago Hyway Robbery, Inc. installed a conveyor system
for $8,000. The conveyor system has been fully depreciated to a zero
salvage value. The company is considering replacing the conveyor
because maintenance costs have been increasing. The estimated end-of-
year maintenance costs for the next five years are as follow:
Year Maintenance
1 $1,000
2 1,250
3 1,500
4 1,750
5 2,000
6- Ten years ago, the Cool Chemical Company installed a heat
exchanger in its plant for $10,000. The company is considering replacing
the heat exchanger because maintenance costs have been increasing. The
estimated maintenance costs for the next 5 years are as follow:
Year Maintenance
1 $1,000
2 1,200
3 1,400
4 1,600
5 1,800

Whenever the heat exchanger is replaced, the cost of removal will be

$1,500 more than the heat exchanger is worth as scrap metal. The
replacement the company is considering has an equivalent annual cost
(EAC) = $900 at its most economic life. Should the heat exchanger be
replaced now if the company’s minimum attractive rate of return
(MARR) is 20%?
7- A graduate of an engineering economy course has complied the
following set of estimated costs and salvage values for a proposed
machine with a first cost of $15,000; however, he has forgotten how to
find the most economic life. Your task is to show him how to do this by
calculating the equivalent annual cost (EAC) for n = 8, if the minimum
attractive rate of return (MARR) is 15%.
Life (n) Estimated End-of-Year Estimated Salvage
Years Maintenance if Sold in Year n
1 $ 0 $10,000
2 $ 0 9,000
3 300 8,000
4 300 7,000
5 800 6,000
6 1,300 5,000
7 1,800 4,000
8 2,300 3,000
9 2,800 2,000
10 3,300 1,000

Remember: Calculate only one EAC (for n = 8). You are not expected to
actually find the most economical life.
 Sheet 8
1- Company F purchased a machine that cost $50,000 and will last 5 years. A
salvage value was not assigned to the asset. Determine the annual
depreciation expense using the straight-line method and prepare the journal
entry to record the expense.
2- A company has purchased an equipment whose first cost is Rs. 1,00,000 with
an estimated life of eight years. The 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 various years using the straight line method of
depreciation.
3- Company F purchased a machine that cost $50,000 and will be able to
produce 500,000 units of product before wearing out. Expected production
by year will be: year 1 – 80,000 units; year 2 – 100,000; year 3 – 100,000;
year 4 – 110,000 and year 5 – 110,000. A salvage value was not assigned to
the asset. Determine the annual depreciation expense using the units-of-
production method and prepare the journal entry to record the expense.
4- Some seed cleaning equipment was purchased in 2009 for $8,500 and is
depreciated by the double declining balance (DDB) method for an expected
life of 12 years. What is the book value of the equipment at the end of 2014?
Original salvage value was estimated to be $2,500 at the end of 12 years.
5- A piece of machinery costs $5,000 and has an anticipated $1,000 resale value
at the end of its five-year useful life. Compute the depreciation schedule for
the machinery by the sum-of-years-digits method.
6- A new machine costs $12,000 and has a $1,200 salvage value after using it
for eight years. Prepare a year-by-year depreciation schedule by the double-
declining balance (DDB) method.
7- The first coat of a road laying machine is Rs. 80,00,000. Its 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.
8- A company has purchased an equipment whose first cost is Rs. 1,00,000 with
an estimated life of eight years. The 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 various years using the sum-of-the-years-digits
method of depreciation.
9- You open a pizza shop and buy 2 delivery vans for a total of $60,000. Make
a sum of the years-digits depreciation schedule using a useful life of 5 years
and a total salvage value of $15,000.
 Sheet 9

1. Sue has decided to start a day-care business. She has found a house
to rent for $1100 per month. Utilities will cost her another $400 per
month. She expects to spend $5 per child per day for breakfast,
lunch and snacks plus another $0.50 per child per day for
expendable supplies such as crayons, glue, paper, coloring books,
and so on. Sue thinks she can charge $18 per day and still be
competitive. How many children must she enroll in order to break
even?
2. A plant produces 15,000 units/month. Find breakeven level if FC =
$75,000 /month, revenue is $8/unit and variable cost is $2.50/unit.
Determine expected monthly profit or loss.
3. Indira Industries is a major producer of diverter dampers used in the
gas turbine power industry to divert gas exhausts from the turbine
to a side stack, thus reducing the noise to acceptable levels for
human environments. Normal production level is 60 diverter
systems per month, but due to significantly improved economic
conditions in Asia, production is at 72 per month. The following
information is available. Fixed costs FC = $2.4 million per month
Variable cost per unit v = $35,000 - Revenue per unit r= $75,000
(a) What is the current profit level per month for the facility? (c)
What is the revenue per unit cost per damper that is necessary if the
production level significantly reduced to 45 units. Note : the fixed
costs is remaining constant.
4. Sue has decided to start a day-care business. She has found a house
to rent for $1100 per month. Utilities will cost her another $400 per
month. She expects to spend $5 per child per day for breakfast,
lunch and snacks plus another $0.50 per child per day for
expendable supplies such as crayons, glue, paper, coloring books,
and so on. Sue thinks she can charge $18 per day and still be
competitive. What is her annual pre- tax profit if she can look after
10 children per day?
5. Sue has decided to start a day-care business. She has found a house
to rent for $1100 per month. Utilities will cost her another $400 per
month. She expects to spend $5 per child per day for breakfast,
lunch and snacks plus another $0.50 per child per day for
expendable supplies such as crayons, glue, paper, coloring books,
and so on. If Sue can look after 12 children per day, how much must
she charge to earn a pre-tax profit of $24,000 per year?
 Sheet 10
1. Krishna Industry needs 24,000 units/year of a bought-out component which
will be used in its main product. The ordering cost is Rs.150 per order and
the carrying cost per unit per year is 18% of the purchase price per unit. The
purchase price per unit is Rs. 75. Find
(a) Economic order quantity
(b) No. of orders per year
(c) Time between successive orders
2. If a product is to be manufactured within the company, the particulars are: r
= 12,000 units/year, k = 24,000 units/year, Co= Rs. 175/set-up Cc = Rs.
15/unit/year
Find the EOQ and cycle time.
3. The annual demand for a component is 30,000 units. The carrying cost is
Rs. 2.00/unit/year, the ordering cost is Rs. 100.00/order, and the shortage
cost is Rs. 12.00/unit/year. Find the optimal values of the following:
(a) Ordering quantity
(b) Maximum inventory
(c) Maximum shortage quantity
(d) Cycle time
(e) Inventory period (t1)
(f) Shortage period (t2)
4. The demand for an item is 12,000/year. Its production rate is 2,000/month.
The carrying cost is Re. 0.20/unit/month and the set-up cost is Rs. 400.00/set-
up. The shortage cost is Rs. 15.00/unit/year. Find the various parameters of
the inventory system.
5. An item is used at a uniform rate of 50,000units per year. No shortage is
allowed and delivery is at an infinite rate. The ordering, receiving and hauling
cost is Rs. 13 per order, while inspection cost is Rs. 12per order. Interest costs
Rs.0.056 and deterioration and obsolescence cost Rs. 0.004 respectively per
year for each item actually held in inventory plus Rs. 0.02 per year per unit
based on the maximum number of units in inventory. Calculate the EOQ. If
lead time is 20 days, frnd re-order level.
6. The demand for an item each costing Re 1, is 10,000units per year. The
ordering I cost is Rs. 10. Inventory carrying charge is 20% based on the
average inventory per 1 year. Stock-out cost is Rs. 5 per unit of shortage
incurred. Find various parameters.
7. A unit is used at the rate of 100per day and can be manufactured at a rate of
600 per day. It costs Rs. 2000 to set up the manufacturing process and Rs.
0.1 per unit per day held in inventory based on the actual inventory any time.
Shortage is not allowed. Find the minimum cost and the optimum number of
units per manufacturing run.
 Sheet 11

1- For a batch of machined parts that require a CNC mill purchased for
$250,000, calculate the machine rate. Two shifts are planned for a plant that
has an average 70% efficiency rate in a 5-year period. Assume that the
machine is to be paid back within 5 years. Also, if the labor rate is $50/hr.
and the overhead rate for labor and machinery are 120% and 80%,
respectively, calculate the processing rate Rp.
2- Estimate the setup time for machining a part shown in the following figure.
Note that the machining involves turning and drilling operations. The
turning operation involves area turning (removing material on the exterior
cylindrical surface) and front-end surface turning as shown. In addition, two
drill operations are to be carried out for the hole at the front-end facedthat
is, a center drill and a hole drilling.
3- A solid block of 12 in. 8 in. 4 in. with a center pocket, as shown in the
following figure, is to be machined from a workpiece of 12 in. 8 in. 4.5 in.
The workpiece material is low carbon steel. The pocket size is 8 in. 4in. 2
in. with fillets of radius 1 in. at four corners. Two NC sequences are used for
the rough cut, a face milling that removes the layer of 0.5 in. material on the
top face, and then a pocket milling that cuts the center pocket. A 1 in.
diameter cutter of 4 teeth is employed for both sequences. A ¼ in. cutter of
length 2.5 in. with 4 teeth is then used for finish cutting. Calculate the cutting
time for both the rough, finish cuts and cost
 Sheet 12
1. A lap welded joint is to be made as shown in Fig. blew
2. A container open on one side of size 0.5 m × 0.5 m × 1 m is to be fabricated
from 6 mm thick plates Fig. 5.5. The plate metal weighs 8 gms/cc. If the
joints are to be welded, make calculations for the cost of container. The
relevant data is : Cost of plate = Rs. 10 per kg, Sheet metal scarp (wastage)
= 5 percent of material, Cost of labour = 10 percent of sheet metal cost, Cost
of welding material = Rs. 20 per meter of weld
3. Calculate the cost of welding two plates 200 mm × 100 mm × 8 mm thick to
obtain a piece 200 mm × 200 mm × 8 mm approximately using rightward
welding technique Fig. The following data is available :Cost of filler material
= Rs. 60 per kg,Cost of oxygen = Rs. 700 per 100 cu meters, Cost of acetylene
= Rs. 700 per 100 cu meters Consumption of oxygen = 0.70 cu m/hr,
Consumption of acetylene = 0.70 cu m/hr, Diameter of filler rod = 4 mm,
Density of filler material = 7.2 gms/cc, Filler rod used per meter of weld =
340 cms, Speed of welding = 2.4 meter/hr, Labour is paid Rs. 20 per hour
and overheads may be taken as 100 percent of labour cost.
 Course evaluation
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