CONTENTS ‘ meee CONTENTS [BREED Introduction 1216 iy # ~~ Ll Ti Origin of Engineering Economy 112 Principles of Engineering Economics a 13 Role of Engineer's in Decision Making 5 7 14 Cash Flow 15. Some Other Useful Topic 8 ‘Old Question Solution R Interest & Time Value of Money _17-44 21 Introduction to Time Value of Money 7 22 Simple Interest o 23 Compound Interest Fe 24 Economic Equivalence n m4 25 Development of Interest Formula Old Question Solution Basic Methodologies of Engineering Economic Analysis = 98 34 Determining Minimum Attractive (Acceptable) Rate of Return (MARR) 2 3.2 Payback Period Method 46 33 Equivalent Worth Methods 2 34 Rate of Return Method ma 35 Public Sector Economic Analysis (Benefit Cost Ratio Method) ey 3.6 Introduction to Life Cycle Costing & 3.7 Introduction to Financial and Economical Analysis 0 Old Question Solution iE Extra Questions Solutions Comparative Analysi is of SEEM Alternatives 99142 41 Comparing Mutually Exclasive Alemativas hat Same Useful Life by s 42. Comparing Matually % Different Useful Lives by 107 43. Comparing Matually Exclusive, Contingent and Independent Projects in Combination 0 Old Question Solution 13 Replacement Analysis 143-169 | 51 Fundamentals of Replacement Analysis 144 52 Economic Service Life of Challenger and Defender 146 5.3 Replacement Analysis When Required Service Lifes Long 152 ‘Old question solution 159 Extra Question Solution 176 (EENEEE Risk Management 181-221 6.1 Origin’/ Sources of Project Risks 181 6.2 Methods of Describing Project risk 182 63. Probability Concept of Economic Analysis 191 64 Decision Tree and Sequential Investment Decision 191 Old Question Solution 198 Extra Question Solution 216 Depreciation & Corporate Income ida Taxes 222-258 7.1 Concept and Terminology of Depreciation m 7.2 Basic Methoi’s of Depreciation 2 73 Introduction to Corporate Income Tax 30 7.4 After Tax Cash Flow Estimate 28 75 General Procedure for Making after Tax Economic Analysis 28 Old Question Solutions a 27 Extra Question Solutions1 Concept of Inflation 82. Measuring Inflation 83 Equivalence Calculation under Inflation 84 Impact of Inflation on Economic Evaluation Old Question Solutions Extra Question Solution Inflation & Its Impact on Project 259. 279 gE Cs Flows a 259 259 261 265 266 276 INTRODUCTION Engineering economics isthe application of economic techniques for the evaluation of design and engineering alternative. The role of engineering economic is to Access the appropriateness of a given project + Estimate its value + Justify it from an engineering peint of view It involves the systematic and technical evaluation of analysis, with emphasis on the economic aspects and has the objective of assisting in decision making, En, decisions towards. minimi cs de with the methods that eneble one to take economic ing costs and/or maximizing benefits to business ‘Some Economics Terminology 1. Annuity: An amount of money payable to a beneficiary at regular intervals for a prescribed period of time out of a fund reserved for hat purpose 2. ‘Break Even Point ‘© In business operation, the rate of operations output or sales at which income is equal to operation cost. ©The percentage of capacity operation of a manufacturing plant ‘at which income will just cover expenses, 3. Capital: The non-human ingredients that contribute to the production of goods and services, including land, raw and semi finished materials, tools building machinery and inventories, 4. Sunk Cost: A sunk cost is a cost that an entity has incurred and which it can no longer recover by any means, Sunk cost should nok be considered when making the decision to continue investing an| 2] Introduction © : wwe cannot recover the cost sunk cost includes ee kerio ee sing ean ee tn ecrmtce tat must be forgone tae of benef scien sleting a course of action among alternatives. 6 Assets: An economic resource of entity (including money resources, physical researches, and inlangible resources). Ze Marginal cost: The cost associated with one additional unit of EG alo called the xremental cost Fp Reteete Organization ‘As an engineer, we should understand the nature of the business organization with which we are associated. This section will present some basic information about the type of organization you should choos should you decide to g0 into business for yourself The three legal forms of business, each having certain advantages and disadvantages, are proprictorships, parinerships, and corporations 1, Proprietorships: A proprietorship is a business owned by one individual. This person is responsible for the firms policies, onns sl its assets, and is personally liable for its debts. A propritorship has fo mujor vantages. First it can be formed. easly and inexpensively. No legal and organizational requirements are associated with setting up a proprictorship, and organizational costs are therefore. virtually nil. Second, the earnings of a proprietorship are taxed at the owner's e fea i Personal tax rate, which may be lower than te me at ee ‘corporate income is taxed. Apart from personal ; a rations the major disadvantage of a proprietorship Tee nt issue stocks and bonds, making it difficult to raise capital for any business expansion. 2 Partnerships: . | ps: A partnership is similar to a proprietorship, except ie thas more than one owner. Most Partnerships are established She amttact between the partners, The contract normally spesties salaries, contributions fo capital, and the distribution Of GmoUnt Of ep ts 8 Partnership typically has @ larger “pital available for business use. Since the personal ascets ofall the partners stand behind the busines a perterhip money more easily from a bank. Each ‘Partner pays orily Personal income tax on his or her share-of © partnership's taxable income. On the negative side, under partnership law each partner's lable or a business's debts. This means that the partners must isk all their personal ascets—even those not invested inthe busines, And while ‘each partner is responsible for his or her portion of the debts in the event of bankrupicy, if any pariners cannot meet ther pro rata claims, the remaining yoriners must take over the untesalved claims. Finally, a partnership has a imited life, inaofar as it must be dissolved and reorganized if one ofthe partners quits Corporations : A corporation is a legal entity created under provincial or federal law. It is separate from its owners and manage advantages 11 Engineesiag Economies |3. vs. This separation gives the corporation four major It can raise capital from a large number of investors by iesuing stocks and bonds 1 permits easy transfer of ownership interest by trading shares of stock: It allows limited liability—personal tiability is limited to the ‘amount of the individual's investment inthe business; and It is taxed differently than proprictorships and partnerships, and under certain conditions, the tax laws favor corporations. On the negative side, it is expensive to establish a corporation. Furthermore, a corporation ts subject to numerous governmental requirements and regulations Origin of Engineering Economy) (208 19.965 + 66.2 + 13,636 + 8.254 -x =0 X= 108,06538 Interest deTime Value of Money : rate? Evaluate FW al the ive and nominal interest 6 What isthe effective and nominal snded continuously with ith 8% interest rate comport ee ee ee inning of each year for first five ‘ash flow of-Rs. 500 at the beginning ne years. Solution: For theory part See at 2072 Astin Transforming the amount to end of each year T= 500xets The worth ofall a the end of 5 year is Y = 5WxeIF/A,S%, 3198.49 The worth of it at the end of 10 years is x = 598.439 F/e.8%, 5) = 3198.39 x e80"5 = ons 7, If you deposit Rs 10,000 isa saving account now, which gives 10% ‘nominal interest rate, what will be the amount after 5 years if interest is compounded ( Semi annually (ii) Monthly Solution: 4) If imerest is compounded semi-annually then m = oifective interest rates ly then m = 2 and the kw = (1+4/myn—1 [2070 Magh] P(E/P, 10.25%, 5) = 10000(1.1025)2 Engineering Economics | 39. = Rs. 16288.992 1) For monthly compounding o19y12 1es7) -1=1047% F = PO/P,1047,5) = 10000 1.10475 Re. 16452.116 8. Find the value of Pif i= 10%, use gradient formula slso. [2070 Magh} Solution: Discounting all cash flow to year 2, P = 10@/A,10 4 PI os sitet ie tn) GOT Rs. 90.004 ‘9. What is difference between nominal and effective interest rate? [2072 Ahswin} Solution: Nominat: Interest rates are the stated, advertised or quoted rates where no time period is started, than per year (also known as per annum) is assumed Effective: Interest rates are what borrow have to actually pay, and depend on how frequently the nominal rate is compounded. (ie. which