Engineering Economy and Finance

ENGINEERING ECONOMY AND
FINANCE
Prof. Jitesh Thakkar

INUSTRIAL MANAGEMENT (IM41081)
Department of Industrial Engineering & Management
Indian Institute of Technology Kharagpur
Function of finance department
Is concerned with money
– Bringing into company
– Looking at how it used
– Paying it out
The Aim of finance department is to ensure
that it provides the organization with the
financial stability to meet it corporate goals
Organization of finance department
• Medium and large size organization : usually with
director of the company
• Small company under owner or an executive director
• Other staff:
– Accountants
• Ledger clerk
• Payroll clerk
• Taxation clerk/ officer
• Purchasing clerk/ officer
• Defining spending limits and procedure of committing
expenditure
• Deal with other organizations such as revenue, banks,
customers and suppliers
Activities of finance department
1. Bringing money into company
2. Using money
3. Paying money out
1. Bringing money into company:
i. Capital planning
ii. Indication of implications of proposed plans
iii. Manage funding e.g. taking loans, using reserves
or increasing share holding
iv. Accounting activities
v. Invoicing for payments of the goods
2. Using money:
To ensure that its money is being used
effectively
– How much its products cost
– Sales prices to be set
– Cash flow requirements
The data is provided by operations departments
products cost profit margin, turnover budgets
Production data  cash flow forecasting
3. Paying money out:
i. Payments for goods and services
ii. Payments to labours (taxes, insurance, PF, etc)
4. Reporting on financial activities
i. Financial information for internal use
 Budgets
 Sales figures
 Capital spend
 Cost of overheads
 Cash flow
ii. Preparation for financial statements required by
law
 Balance sheet
 Profit and loss accounts
iii. Financial information for other external sources
e.g. for loan
The ideal financial system
• The most cot effective method of ensuring that the
organization can operate its financial affairs in such a way
that the organization goals may be best served
– Annual audited accounts for government
requirements : financial accounting
– Business performance data with sufficient accuracy
for internal use : management accounting
financial accounting
The Balance sheet
1. A Financial snap shot of the organization
2. Generally prepared on last day of the financial year
3. The balance sheet is to be considered along with other
documents such as profit and loss account
4. It operates on the principle that if you have something it must
have been paid for somehow
5. To represent this on a balance sheet :
 one side would show where money comes from
 The other side shows what has done been with it
6. Assets equal the sources of the funds
Assets = Liabilities
The Balance sheet
Liabilities
Assets
1. Long term liabilities
1. Fixed assets
2. Current liabilities
2. Current assets
Total liability
Total assets
3. Capital and reserves
Assets & Liabilities
Fixed assets:
a. Tangible assets: plant, machinery, building,
(depreciation is allowed for and value of given asset
falls down with time), goodwill (loyal customer
prepared to pay over market rates)
b. Investments : long term investments (more than 1
financial year, such as loan made to other
companies, fixed deposits, mutual funds,
debentures purchased),
Total fixed assets =a +b
Current assets:
a. Cash on hand
b. Cash in bank
c. Stock (useful components , raw materials, work in progress)
d. Debtor (someone who is shortly to pay money)
e. short term investments (known as money market investments)
Liabilities
a. Long term liabilities (due after more than 1 year)
 Loan taken
 Debenture sold (an agreement with lender to repay money at
fixed rate over a period of time in return for lump sump)
b. Current liabilities (due in less than 1 year)
 Creditor (people to whom organization owes money, normal
period 30 days)
 Tax
 Unpaid bills to be paid within 1 year
Total liabilities =a +b
Capital and Reserves
1. Called-up share capital : money raised through sale of
shares at their nominal value.
2. Reserves : the reserve transferred out profit to at
discretion of the directors. Reserve may include
balancing amounts of money caused by revaluation of
property.
3. Share premium account : the amount of money raised
by issuing share at a price above their nominal value.
Profit and loss account
profit and loss

=total assets – (total liabilities + total
capital and reserves)
Example: 1
Prepare a balance sheet for CNZ Limited as on
date with the help of given financial details
along with the entry of profit and loss
account
Financial details
Details Value in Lakh Rs.
1. Building 82.0
2. Cash in hands 30.0
3. Debentures purchased for 5 years 60.0
4. Debentures sold for 3 years 20.0
5. Equipment 48.0
6. Finished products 16.0
7. Loan from ICICI 40.0
8. Loan given to XYZ for 10 years 10.0
9. Payment collected 22.0
10. Raw material 18.0
11. Reserve 15
12. Share capital 300
13. Unpaid bills 25.0
14. WIP 12.0
Consider depreciation @10% for tangible
assets
Identify assets
Details Asset/ liabilities/surplus
1. Building 82.0 A
2. Cash in hands 30.0 A
3. Debentures purchased for 5 years 60.0 A
5. Equipment 48.0 A
6. Finished products 16.0 A
8. Loan given to XYZ for 10 years 10.0 A
9. Payment to be collected 22.0 A
10. Raw material 18.0 A
11. Reserve 15
12. Share capital 300
13. Unpaid bills 25.0
14. WIP 12.0 A
Identify Financial Liabilities
1. Building 82.0
4. Debentures sold for 3 years 20.0 L
5. Equipment 48.0
7. Loan from ICICI 40.0 L
10.Raw material 18.0
11.Reserve 15
12.Share capital 300
13.Unpaid bills 25.0 L
14.WIP 12.0
Identify capital and reserves
1. Building 82.0
5. Equipment 48.0
10.Raw material 18.0
11.Reserve 15 C
12.Share capital 300 C
13.Unpaid bills 25.0
14.WIP 12.0
Financial details
Details Category
Building A1
Equipment A2
Debentures purchased for 5 years A3
Loan given to XYZ for 10 years A4
Cash in hands A5
Raw material A6
WIP A7
Finished products A8
Payment collected A9
Loan from ICICI L1
Debentures sold for 3 years L2
Unpaid bills L3
Reserve C1
Share capital C2
Profit and loss and appropriation
1. It is the objective of the business is to make profit
Buying raw material / things value addition  selling at
sufficient high price  pay labour, material cost and cost of
running business  the money left is Profit
2. The profit is disposed as per desire:
• Payments to shareholders
• Purchase of new assets
• Bonuses to employees
3. Unlike the balance sheet , the profit and loss account applies to
a period of time and shows the cumulative effect of all the
transactions over a period of time, usually a year
Profit and loss and appropriation
Year 5year 4
• Turn over 9070083800
• Net operating cost 7150066600
• Profit before tax 1920017200
• Tax 6200 5800
• Profit after tax 1300011400
• Dividends 1900 1700
• Profit retained 111009700
Cash flow projections
• Cash flow projections are covered to any
situation where the disbursement of cash is
important
Year sale cost profit loan repayment outstanding
loan
5. - - - - 30
6. 105 80 19 2 28
7. 125 95 22 10 18
8. 130 89 33 12 6
9. 130 87 35 6 00
10. 139 87 35 0 00
Financial Ratios
The Use Of Financial Ratios
 Analyzing Liquidity
 Analyzing Activity
 Analyzing Debt
 Analyzing Profitability
 A Complete Ratio Analysis
Groups of Financial Ratios
1.Liquidity
2.Activity
3.Debt
4.Profitability
Analyzing Liquidity
1. Liquidity refers to the solvency of the
firm's overall financial position, i.e. a
"liquid firm" is one that can easily meet its
short-term obligations as they come due.
2. A second meaning includes the concept of
converting an asset into cash with little or
no loss in value.
Three Important Liquidity Measures
Net Working Capital (NWC)

NWC = Current Assets - Current Liabilities
Current Ratio (CR)
Current Assets
CR =
Current Liabilities
Quick (Acid-Test) Ratio (QR)
Current Assets - Inventory

QR =
Current Liabilities
Return on capital employed
(ROCE)
ROCE= (Pre tax Profit) / capital employed
The capital employed means the capital used

in creation of the profit, which is defined as
total asset less current liability
it indicates how much money was used in the
generation of the profit.
Profit margin
Profit margin=
(trading profit) / (total sales)
= (value of sales – cost of
sales) / sales value
(stock) Turnover (ST)
Cost of Goods Sold
Inventory (stock) Turnover (ST) =
(stock) Inventory (stock)
Analyzing Debt
 Debt is a true "double-edged" sword as it allows
for the generation of profits with the use of
other people's (creditors) money, but creates
claims on earnings with a higher priority than
those of the firm's owners.
 Financial Leverage is a term used to describe the
magnification of risk and return resulting from
the use of fixed-cost financing such as debt and
preferred stock.
Four Important Debt Measures
Total Liabilities
Debt Ratio DR=
Total Assets
(DR)
Long-Term Debt
Debt-Equity Ratio DER=
(DER) Stockholders’ Equity
Earnings Before Interest

& Taxes (EBIT)
Times Interest Earned TIE=
Interest
Ratio (TIE)
Earnings Before Interest &
Taxes + Lease Payments
FPC=
Fixed Payment Coverage Ratio (FPC) Interest + Lease Payments +
{(Principal Payments +
Preferred Stock Dividends) X
[1 / (1 -T)]}
Analyzing Profitability
– Profitability Measures assess the firm's ability to
operate efficiently and are of concern to
owners, creditors, and management
– A Common-Size Income Statement, which
expresses each income statement item as a
percentage of sales, allows for easy evaluation of
the firm’s profitability relative to sales.
Seven Basic Profitability Measures
Gross Profit Margin (GPM)
Gross Profits
GPM=
Operating Profit Margin Sales
(OPM) OPM =
Operating Profits (EBIT)
Sales
Net Profit Margin (NPM) Net Profit After Taxes
NPM=
Sales
Return on Total Assets Net Profit After Taxes
(ROA) ROA=
Total Assets
Return On Equity (ROE) ROE=
Net Profit After Taxes
Stockholders’ Equity
Earnings Per Share (EPS) Earnings Available for
Common Stockholder’s
EPS =
Number of Shares of Common
Price/Earnings (P/E) Ratio Stock Outstanding
Market Price Per Share of
Common Stock
P/E =
Earnings Per Share
Other ratios
• Gearing ratio = (fixed term loan+ debentures
sold) / Net asset
This ratio indicates commitment for repayment
of borrowed money, the higher ratio indicates
that the profit is likely to be diverted for
repaying the loans
Other ratios
•Output per employee = (value of sales)/
Number of employees
Example : 1
Liquidity ratio
Quick (Acid-Test) Ratio (QR)
Current Assets - Inventory

QR =
Current Liabilities
= (98-18-12-16)/25 = 2.08
A measure of firm’s ability to pay off short-term
obligation without relying on the sales of its
inventories
management accounting
Costing
1. It is the process of calculating how much something costs to
make.
2. The most important use of information is in determining the
realistic selling price.
3. Helps to determine which product areas are worth investing
4. Provides information for decisions relating to making or
buying-in parts
5. Allows to decide which product need further developments
for desired profit
6. The term ‘costing’ generally applies to existing products
Components of costing
1. Material
2. Labour
3. Lighting
4. Heating
5. Transportation
6. Professional services
7. Human resources development
8. Administration
Methods of costing
1. The first method is based on direct and
indirect costs.
2. The second is based on variable and fixed
cost.
Direct and indirect costs
1. Direct costs: can be directly attributed to the
product for which a cost is being prepared.
i. Direct labours for the particular product
ii. Direct material based on bill of material for a particular
product
iii. Direct expenses relates to the costs incurred in buying
services for the particular product
Direct and indirect costs
2. Indirect costs: are also called ‘overheads’, are the costs
associated with operating the business which can not be
directly assigned to product or services being provided.
i. Material used for other products also: e.g. soldering
flux, rags, cutting fluid etc.
ii. Indirect Labour would include design engineers,
supervisors and administrative staff
iii. Indirect expenses would include heating, lighting and
rent of premises
Recovery of overheads
1. Apportionment (distribution) to cost centre
2. Absorption (inclusion) by product
Apportionment to cost centre
1. A Cost centre is part of business that can be
identified for the purpose of determining the costs
i. Whole factory
ii. Particular department
iii. Specific machine
iv. Particular product
v. Particular person
2. Each cost centre should bare a fair share of indirect
costs
Apportionment to cost centre
3. Typical bases for apportionment
i. Floor area for rent
ii. Number of employees for indirect labour and personnel
costs
iii. Book value of assets for depreciation and insurance
Absorption of overhead by product
1. Indirect costs charged to a individual

product
2. Calculated on the bases of :
i. Standard or expected rate , volume of
production
ii. Units of output and machine hours
iii. Material rates is divided by the actual or
expected costs of direct materials
Full costing
1. The cost of product based on both direct and
overhead costs
fixed and variable costs
1. Sometimes the cost of a product is divided into: fixed and
variable costs
2. The variable costs are those that vary in proportion to the
amount of output and so would include:
i. Direct materials
ii. Use of temporary labour
iii. Overtime charges
3. The fixed costs are paid irrespective of output
i. Cost of employing people
ii. Cost of having premises
iii. Cost of machinery available
Break-even point for
the manufacture of any product
• This the point at which the income from sales
is equal to the cost of manufacture, where no
profit or loss is made, and company breaks
even.
Example : 2
Following data is the cost incurred by a
manufacturing company
Department Overhead in Direct material Number of
Rs. cost in Rs. employees
Personnel 52,000 - 4
Purchase 65,000 - 2
Machine shop 1,25,000 6,20,000 8
Assembly shop 1,00,000 1,75,000 6
Example : 2
Above mentioned job is manufactured in a
machine shop for which direct material cost
is Rs. 25; direct labour cost is Rs. 18 and
direct expenses is Rs. 10 per unit. The
overhead should be absorbed on the basis of
direct material rate. Find the total cost of the
job.
Example : 2- solution
1. The problem is to be solved by apportion and absorption of
overhead costs
2. Eliminate the cost of personnel department by distributing the
overhead of personnel department proportionately to other
departments.
Basis of distribution= number of employees in a particular
department
i. Total number of employees from other than personnel = 2+8+6 = 16
ii. Towards purchase department = (2/16)*52,000 = 6,500
iii. Towards m/c shop = (8/16)*52,000 = 26,000
iv. Towards assembly shop = (6/16)*52,000 = 19,500
3. Total overhead purchase dept. =6,50,000+ 6,500
=71,500
3. Apportioning of purchase overheads to production shops
Basis of distribution= direct material cost in a particular department
TOTAL DIRECT MATERIAL COST= 6,200,00 + 1,75,000=
7,95,000
i. Towards machine shop =
(71,500* 6,20,000) / 7,95,000= 55,761
i. Towards assembly shop =
(71,500*1,75,000) / 7,95,000= 15,738
4. Total overhead of machine shop =
m/c shop overhead +personnel portion + purchase portion =
1,25,000+26,000+55,761=2,06,761
5. Total overhead of assembly shop =
assembly shop overhead +personnel portion + purchase portion =
1,000,00 + 19,500 + 15,738
= 1,35,238
6. Total overheads of production shops = overhead of machine shop
+ overhead of assembly shop= 2,06,761 + 1,35,238 = 3,42,000
7. Material recover rate (MRR) :
for processing every Rupee of material in machine shop the
overhead = machine shop overhead / direct material cost =
2,06,761 / 6,20,000 = 0.33, As the cost of direct material is Rs. 25 ,
MRR = 25+25*0.33 = 33.25
8. Total cost of job which is manufactured in machine shop = 25
+ 8.25 + 18 + 10 = 61.25
Example : 3
The running cost of a machine is as follows:
Values are in Rs.
1. Tooling cost 35,000
2. Maintenance 18,000
3. Spare parts 23,000
4. Power cost 4.5 per hour
• The machine is depreciated at the rate of Rs. 6,000 every
year
• The expected run time is 313 days with two shifts of 8 hours
each day i.e. 16 hours per day
Example : 3
• Find out overhead recovery rate and total cost of a job
manufactured on this machine with the following additional
information:
 Direct material cost : Rs. 180
 Direct labour cost: Rs. 250
 Direct expenses : Rs. 120
 Machine usage time : 6.5 hours
Example : 3 - solution
1. Total working hours =
313*16=5,008 per year
2. Power cost per year =5,008*4.5=22,536
3. Total overhead for the machine = Tooling cost
35,000+Maintenance 18,000 +Spare parts 23,000 +
Depreciation 6,000 + Power cost 22,536 = 98,536
4. Machine hour rate = total overhead / number of working
hours = 98,536 / 5,008 =20.87 Rs. Per hour
5. Total cost = 180 + 250 + 120 + (6.5*20.87) = 685.67
Investment appraisal
1. It is way of analyzing the financial value of cost of
investment decisions.
2. This is not only technique to be used and there will be
always many factors that affect a decision
3. This helps in comparing investments and forcing you to
think about the cost of a particular decision
4. Investment appraisal is not a costing exercise
5. Example : the cost and returns associated with the
purchase of a new equipment
Techniques of Investment appraisal
1. Payback period :
i. It is the time that a project must run in order that the
cash generated will repay the initial investment.
ii. Payback is calculated on the basis of absolute values of
the expected income after tax.
iii. This is simple a technique and therefore widely used
iv. The early returns are generally preferred to the longer
ones
v. It does not recognize that that money devalues with
time
Example : 4
1. Investment = Rs. 1,00,000
2. Annual return = Rs. 20,000
3. Payback =
(1,00,000 / 20,000) = 5 years
Techniques of Investment appraisal
2. Discounted cash flow:

i. Looks at the earning the life of the project and the time
at which returns are received , and it allows for the fall in
value a period of time.
ii. It is a fact that Rs. 100 today is worth more than Rs. 100
would be in a few years’ time. This comes about not
because of inflation, which evens out over a period of
time and also affects both costs and profit equality , but
because Rs. 100 invested today will attract interest at
some rate and therefore investment will increase in
value.
The present value
• If the interest rate is 10% and we invest Rs. 500 today and in
five years’ of time the investment will be worth Rs. 805,
assuming that the interest is immediately reinvested at the
same rate and that capital is left untouched.
– 500*1.10*1.10*1.10*1.10*1.10 = 805
• In a similar way we can work backward and say that if the
interest rate is 10% then Rs.500 payable in fivers’ time will be
worth Rs. 310 today.
– 500/ (1.1)5 = 310
– 310*1.10*1.10*1.10*1.10*1.10 = 500
• This called the present value
The present value
P = S / (1+i)n
Where
P = Present value
S = Sum in future
i = interest rate (also called discount rate)
n = number of years
Net present value
1. An investor get 8% interest per annum by investing money in
a building society . The investor is offered an alternative
investment by another company which will provide Rs.
3,88,000 at the end of each of three following years
2. In order to calculate the value of this second investment we
need to asses what it is worth today
Net present value
P = ((3,88,000) / 1.081) + ((3,88,000) / 1.082) +
((3,88,000) / 1.083)
= 3,59,259.3 + 3,32,647.5 + 3,08,006.9 = 9,99,913.6
The present value of the investment is Rs. 9,99,913.6

therefore if the capital cost of the second investment is less
than Rs. 9,99,913.6 then this investment will make more
money
Net Present Value =

present value of the return – capital cost
Example : 5
• An investment of Rs. 13000 yields return of Rs. 4000
per year for first three years and Rs. 2000 per year
the next two years
• By calculating net present values determine whether
this is a worth investment, if the money could
otherwise be invested at 5 % per annum or at 10 %
per annum
Example : 5 solution
1. Present value at 5 % interest
P = (4000/1.051)+(4000/1.052) +(4000/1.053) +(2000/1.054)+
(2000/1.055)
= Rs. 14105
2. Net Present value at 5 % interest
= 14195 – 13000 = +1105
3. If the money could only be invested at 5 % then this is
worthwhile investment as it would bring a positive
net present value
Example : 5 solution
1. Present value at 10 % interest
P = (4000/1.101)+(4000/1.102) +(4000/1.103) +(2000/1.104)+
(2000/1.105)
= Rs. 12555
2. Net Present value at 5 % interest
= 12555 – 13000 = - 445
3. If the money could be invested elsewhere at 10 %
then this is not profitable investment as it would
bring a negative net present value
Internal rate of return
1. This is the discount rate, or rate of interest , at
which net present value is zero
2. it is a point at which you break even.
3. Data of example : 5
@ 5 % NPV = + Rs. 12555
@ 10 % NPV = - Rs. 445
IRR = 5 + ((1105/(1105+445)) = 8.56 %
Depreciation
1. Investments in terms of cost to buy are considered as asset
to the company in successive years with decreasing value
2. The term used to describe this reduction in value is
depreciation . The reduced vale is considered as book value
3. There are accounting techniques to calculate depreciation
4. The factors for depreciation :
i. Wear and tear
ii. Shelf-life
iii. Damage due to misuse
Depreciation
5. Depreciation must be incorporated in balance sheet
to show the reduction in asset value
6. Book value = cost of asset - depreciation
7. Stock is not to be depreciated because it is valued
annually
8. Methods for calculating depreciation
i. Straight-line method
ii. Reducing-balance method
iii. Production unit method
Straight-line method
1. Asset is depreciated by equal annual charges spread
over asset’s estimated life
2. D= (c-s)/n
D= depreciation charge, c= cost, s=scrap value,
n= estimated life
1. Example
i. Cost : Rs. 6,00,000
ii. Scrap value : Rs. 40,000
iii. Estimate life : 10 years
iv. Annual depreciation
= (6,00,000 – 40000) /10 = 56,000
Reducing-balance method
1. The depreciation charge is a constant proportion of
balance remaining at the end of each accounting period.
2. Example
i. Cost : Rs. 6,00,000
iii. Estimate life : 10 years
value year
Rs. 600000 0
Rs. 6,00,000 – 10% =54,0000 1
Rs. 54,0000 – 10%=48,600 2
Production unit method
1. The depreciation charge is based on number
of units of work produced
2. D= (c-s)/N
D= depreciation charge, c= cost, s=scrap value,
N= estimated production units
3. Example
i. Cost : Rs. 13,00,000
iii. Estimate production : 2,50,000 units
iv. Depreciation charge = (13,00,000- 50,000)/ 2,50,000
= Rs. 5 per unit
Example : 6
• A transport vehicle was purchased at a cost of
Rs.18,50,000 . The useful life in terms of
number of kilometer is 4,50,000 and scrap
value is Rs. 50,000 . Calculate the
depreciation rate and find out deprecation for
1st and 2nd year and also calculate the book
value of vehicle if it has travelled 13,000 km in
1st year and 18,500 km in 2nd year
Example : 6 - Solution
1st year:
• Cost C=18,50,000 Rs.
• Working units N=4,50,000 km
• Scarp value s = 50,000 Rs.
1. Depreciation rate =
(18,50,000 - 50,000)/ 4,50,000 = 4 Rs./km.
2. Depreciation for 13,000 km. = 4* 13,000
= 52,000 Rs.
3. Book value = cost of asset – depreciation
=18,50,000 - 52,000 = 17,98,000 Rs.
Example : 6 - Solution
2nd year:
• Cost C=18,50,000 Rs.
• Working units N=4,50,000 km
• Scarp value s = 50,000 Rs.
1. Depreciation rate =
(18,50,000 - 50,000)/ 4,50,000 = 4 Rs./km.
2. Depreciation for 18,500 km. = 4* 18,500
= 74,000 Rs.
3. Book value
= cost of asset after 1 year – depreciation in 2nd year
=17,98,000 - 74,000 = 17,24,000 Rs.
Example : 7
The following data is given for a company
Department Direct No. Of Floor Dept
Material cost employees area m2 overhead
Rs. Rs.
M/c shop 5,00,000 14 500 90,000
Ass shop 2,50,000 20 1,000 74,000
Moulding 2,00,000 14 1,000 82,000
shop
Personnel 0 5 0 50,000
Purchase 0 6 0 70,000
Maintenance 0 3 0 30,000
Total 9,50,000 62 2,500 3,96,000
Example : 7
Apportion the overhead to 3 production
shops and calculate the cost of a job which is
manufactured a moulding shop where
material cost is Rs. 74 and labour cost is Rs. 50
1. The problem is to be solved by apportion and absorption of
overhead costs
2. Eliminate the cost of personnel department by distributing the
overhead of personnel department proportionately to other
departments.
Basis of distribution= number of employees in a particular
department
3. Machine shop
i. Total number of employees from other than personnel = 62-5= 57
ii. Towards m/c shop = (14/57)*50,000 = 12,280.7
iii. Updated overhead of m/c shop =90,000+12,280=
1,02,280.7
4. Assembly shop :
• personnel apportionment
= (20/57)*50,000 = 17,543
• Updated overhead of assembly shop
=74,000 + 17,543 = 91,543
5. Moulding shop :
= (14/57)*50,000 = 12,280
• Updated overhead of moulding shop
=83,000 + 12,280 = 94,280
6. Purchase department:
= (6/57)*50,000 = 5,263
• Updated overhead of Purchase department
=70,000 + 5,263 = 75,263
7. Maintenance department:
= (3/57)*50,000 = 2,631
• Updated overhead of Purchase department
=30,000 + 2,631 = 32,631
1. Eliminate the cost of purchase department by distributing
the overhead of personnel department proportionately to
other departments.
Basis of distribution= cost of direct material in a particular
department
2. Machine shop
i. Total cost of material= 5,00,000 +2,50,000 +2,00,000 = 9,50,000
ii. Towards m/c shop = (14/57)*50,000 = 12,280.7
iii. Updated overhead of m/c shop =90,000+12,280=
1,02,280

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Engineering Economy and Finance

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ENGINEERING ECONOMY AND

Prof. Jitesh Thakkar

profit and loss

Net Working Capital (NWC)

Quick (Acid-Test) Ratio (QR)

Current Assets - Inventory

ROCE= (Pre tax Profit) / capital employed

The capital employed means the capital used

Earnings Before Interest

Current Assets - Inventory

1. Indirect costs charged to a individual

2. Discounted cash flow:

The present value of the investment is Rs. 9,99,913.6

Net Present Value =

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