It provides the managers not only a sound basis but also a clear-cut approach to decision making. What is more, the book adequately illustrates these approaches with numerical problems and Indian cases.
A distinguishing feature of the book is that it has an Appendix on interest tables for a wide range of interest rates 0. Engineering Economics By R. Panneerselvam Free? Save my name, email, and website in this browser for the next time I comment.
Let us consider the converse of the previous example, i. Simultaneous increase in output and decrease in input. Let us assume that there are advanced automated technologies like robots and automated guided vehicle system AGVS , available in the market which can be employed in the organization we are interested in.
Initially, the cost on equipment would be very high. But, in the long run, the reduction in the operation cost would break-even the high initial investment and offer more savings on the input. The increased production will yield more revenue. In this example, in the long run, there is an increase in the revenue and a decrease in the input.
Hence, the productivity ratio will increase at a faster rate. In the process of managing organizations, the managers at different levels should take appropriate economic decisions which will help in minimizing investment, operating and maintenance expenditures besides increasing the revenue, savings and other related gains of the organization. Introduction 7 Scope The issues that are covered in this book are elementary economic analysis, interest formulae, bases for comparing alternatives, present worth method, future worth method, annual equivalent method, rate of return method, replacement analysis, depreciation, evaluation of public alternatives, inflation adjusted investment decisions, make or buy decisions, inventory control, project management, value engineering, and linear programming.
Variable cost varies with the volume of production while overhead cost is fixed, irrespective of the production volume. Variable cost can be further classified into direct material cost, direct labour cost, and direct expenses. The overhead cost can be classified into factory overhead, administration overhead, selling overhead, and distribution overhead. Direct material costs are those costs of materials that are used to produce the product. Direct labour cost is the amount of wages paid to the direct labour involved in the production activities.
Direct expenses are those expenses that vary in relation to the production volume, other than the direct material costs and direct labour costs. Overhead cost is the aggregate of indirect material costs, indirect labour costs and indirect expenses. Administration overhead includes all the costs that are incurred in administering the business. Selling overhead is the total expense that is incurred in the promotional activities and the expenses relating to sales force.
Distribution overhead is the total cost of shipping the items from the factory site to the customer sites. Let the cost of producing 20 units of a product be Rs. Then the marginal cost of producing the 21st unit is Rs.
Let, the revenue of selling 20 units of a product be Rs. Then, the marginal revenue of selling the 21st unit is Rs. Let us assume that an equipment has been purchased for Rs. If it is considered for replacement, then its present value is not Rs. Instead, its present market value should be taken as the present value of the equipment for further analysis. So, the purchase value of the equipment in the past is known as its sunk cost.
The sunk cost should not be considered for any analysis done from nowonwards. If the same money is invested in some other alternative Y , it may fetch some return. Since the money is invested in the selected alternative X , one has to forego the return from the other alternative Y. The amount that is foregone by not investing in the other alternative Y is known as the opportunity cost of the selected alternative X.
So the opportunity cost of an alternative is the return that will be foregone by not investing the same money in another alternative. Consider that a person has invested a sum of Rs.
Let the expected annual return by this alternative be Rs. Then, the corresponding total return per year for the investment in the bank is Rs. This return is greater than the return from shares. The foregone excess return of Rs. The corresponding volume of production on the X-axis is known as the break-even sales quantity. At the intersection point, the total cost is equal to the total revenue. This point is also called the no-loss or no-gain situation.
For any production quantity which is less than the break-even quantity, the total cost is more than the total revenue. Hence, the firm will be making loss. Hence, the firm will be making profit. The margin of safety M. Define economics. Also discuss the flow of goods, services, resources and money payments in a simple economy with the help of a suitable diagram. Illustrate the effect of price on demand and supply; illustrate with the help of a diagram.
Discuss the factors which influence demand and supply. Distinguish between technical efficiency and economic efficiency by giving examples. What are the ways by which the economic efficiency can be improved?
Give the definition and scope of engineering economics. Clearly explain the method of deriving the selling price of a product. Define the following costs with examples: a Sunk cost b Opportunity cost c Marginal cost d Marginal revenue. Define break-even point. Draw a break-even chart and explain its components. Krishna Company Ltd. Consider the following data of a company for the year One can manage many of these decision problems by using simple economic analysis. For example, an industry can source its raw materials from a nearby place or from a far-off place.
This would certainly add cost to the product. Under such a situation, the procurement of the raw material should be decided in such a way that the overall cost is minimized.
Among various elements of cost, raw material cost is most significant and it forms a major portion of the total cost of any product. In this process, if the new raw material provides any additional benefit, then it should be treated as its welcoming feature. This concept is demonstrated with two numerical problems.
Either material will provide equal service, but the aluminium casting will weigh 1. The aluminium can be cast for Rs. The cost of machining per unit is Rs.
Every kilogram of excess weight is associated with a penalty of Rs. Which material should be specified and what is the economic advantage of the selection per unit? Hence, aluminium is suggested for making the jet engine part. The different materials used to manufacture the tables and their costs are given in Table 2. Table 2. The wooden top therefore could be replaced with a granite top. This would require additional wood for the frame and legs to take the extra weight of the granite top.
The materials and labour requirements along with cost details to manufacture a table with granite top are given in Table 2. Compute the cost of manufacture of the table under each of the alternatives described above and suggest the best alternative.
Also, find the economic advantage of the best alternative. Hence, the table with granite top should be selected by the manufacturer. Design is an important factor which decides the cost of the product for a specified level of performance of that product. The elementary economic analysis applied to the selection of design for a product is illustrated with two example problems.
Either design will serve the purpose and will involve the same material and manufacturing cost except for the lathe and grinder operations. Design A will require 16 hours of lathe time and 4. Design B will require 7 hours of lathe time and 12 hours of grinder time per 1, units. The operating cost of the lathe including labour is Rs.
The operating cost of the grinder including labour is Rs. Which design should be adopted if 1,00, units are required per year and what is the economic advantage of the best alternative? Hence, design B is recommended for making the tapered fastening pin. The chief engineer of refinery operations is not satisfied with the preliminary design for storage tanks to be used as part of a plant expansion programme.
From a graph of the article, the engineer found that the present ratio of height to diameter of 1. The cost for the tank design as originally submitted was estimated to be Rs. What are the optimum tank dimensions if the volume remains the same as for the original design? What total savings may be expected through the redesign? Hence, it is assumed that the price of raw material is location dependent. While sourcing a raw material, the cost of transportation is to be considered in conjunction with the price of the raw material.
This concept is demonstrated with a numerical example. Either steel or aluminium window frames will satisfy the design criteria. Because of the remote location of the building site and lack of building materials in Alpha State, the window frames will be purchased in Beta State and transported for a distance of 2, km to the site.
The price of window frames of the type required is Rs. The weight of steel window frames is 75 kg each and that of aluminium window frame is 28 kg each. The shipping rate is Re 1 per kg per km.
Which design should be specified and what is the economic advantage of the selection? Hence, aluminium window frame is recommended.
The process sequence of a component which has been planned in the past is not static. It is always subject to modification with a view to minimize the cost of manufacturing the component. The steps in process planning are as follows: 1. Analyze the part drawing to get an overall picture of what is required. Make recommendations to or consult with product engineers on product design changes.
List the basic operations required to produce the part to the drawing or specifications. Determine the most practical and economical manufacturing method and the form or tooling required for each operation. Devise the best way to combine the operations and put them in sequence.
Specify the gauging required for the process. Steps 3—5 aim to determine the most practical and economical sequence of operations to produce a component. This concept is demonstrated with a numerical problem. Solution a Cost of component using process sequence 1. The process sequence 1 of the component is as follows: Turning — Milling — Shaping — Drilling The calculations for the cost of the above process sequence are summarized in Table 2.
The process sequence 2 of the component is as follows: Turning — Milling — Drilling The calculations for the cost of the above process sequence are given in Table 2. The process sequence 3 of the component is as follows: Only CNC operations The calculations for the cost of the above process sequence are summarized in Table 2.
Therefore, it should be selected for manufacturing the component. List and explain the different situations deserving elementary economic analysis. Explain the steps in the process planning. In the design of an aircraft jet engine part, the designer has a choice of specifying either an aluminium alloy casting or a steel casting. Either material will provide equal service, but the aluminium casting will weigh 5 kg as compared with 7 kg for the steel casting.
The aluminium part can be cast for Rs. Two alternatives are under consideration for a hexagonal bolt fastening pin. Either design will serve equally well and will involve the same material and manufacturing cost except for the lathe and grinder operations.
Elementary Economic Analysis 25 Design A will require 20 hours of lathe time and 8 hours of grinder time per 10, units. Design B will require 10 hours of lathe time and 22 hours of grinder time per 10, units. Which design should be adopted if 10,00, units are required per year and what is the economic advantage of the best alternative?
A building contractor can source door frames from either a nearby shop or a far-off forest area. The cost details are as summarized in the following table. The total requirement of wood for the construction work is 75 tons.
Also find the economic advantage of the best decision. Consider Example 2. Rework this example if the ratio of the height to diameter corresponding to the minimum cost is instead of The process planning engineer of a firm listed down the sequences of operations, as shown in the following table to produce a component: Sequence Process sequence 1 Turning — Milling — Shaping — Drilling 2 Turning — Milling — Drilling 3 All operations are performed with CNC machine The details of process time for the components for various operations and their machine hour rates are tabulated now.
Operation Machine hour Process sequence rate Rs. It represents the growth of capital per unit period. The period may be a month, a quarter, semiannual or a year. So, the total amount at the end of the first year will be Rs. Hence the total amount at the end of the second year will be Rs. The process will continue thus till the specified number of years. Table 3. The maturity value at the end of the fifth year is Rs. This means that the amount Rs.
This is diagrammatically shown in Fig. This explanation assumes that the inflation is at zero percentage. Alternatively, the above concept may be discussed as follows: If we want Rs. A detailed working is shown in Table 3. Similarly, if we want Rs. Also, this concept can be stated as follows: A person has received a prize from a finance company during the recent festival contest.
Spot payment of Rs. If this option is followed, the equivalent amount for Rs. This example clearly demonstrates the time value of money. To simplify all these computations, it is extremely important to know how to use interest formulas more effectively. Before discussing the effective application of the interest formulas for investment-decision making, the various interest formulas are presented first.
Interest rate can be classified into simple interest rate and compound interest rate. In simple interest, the interest is calculated, based on the initial deposit for every interest period. In this case, calculation of interest on interest is not applicable. In compound interest, the interest for the current period is computed based on the amount principal plus interest up to the end of the previous period at the beginning of the current period.
The cash flow diagram of this situation is shown in Fig. Interest Formulas and Their Applications 29 F. Find the maturity value after 10 years. The corresponding cash flow diagram is shown in Fig. What is the single-payment that he should deposit now so that he gets the desired amount after 10 years? In Fig. He plans to invest an equal sum of Rs.
Find the maturity value of his account when he is 60 years old. Find the equivalent amount that must be deposited at the end of every year for the next 15 years. Find the single-payment that must be made now as the reserve amount. The corresponding cash flow diagram is illustrated in Fig. This amount should be repaid in 15 yearly equal installments. Find the installment amount that the company has to pay to the bank.
Find the total amount at the end of the 10th year of the above series. The cash flow diagram is shown in Fig. He has 10 more years of service. He would like to deposit Rs. But, in practice, the compounding may occur less than a year. For example, compounding may be monthly, quarterly, or semi-annually.
Compounding monthly means that the interest is computed at the end of every month. The compounding is quarterly. Find the maturity amount of the deposit after 10 years. Let us assume that an organization has a huge sum of money for potential investment and there are three different projects whose initial outlay and annual revenues during their lives are known.
The executive has to select the best alternative among these three competing projects. Interest Formulas and Their Applications 39 There are several bases for comparing the worthiness of the projects. These bases are: 1. Present worth method 2. Future worth method 3. Annual equivalent method 4. Rate of return method These methods are discussed in detail in Chapters 4—7. Explain the time value of money. Give practical applications of various interest formulas.
A person deposits a sum of Rs. Find 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. A person who is just 30 years old is planning for his retired life. A company is planning to expand its business after 5 years from now. The expected money required for the expansion programme is Rs. The company can invest Rs. If not, find the difference in amounts for which the company should make some other arrangement after 5 years.
A financial institution introduces a plan to pay a sum of Rs. Find the annual equivalent amount that a person should invest at the end of every year for the next 10 years to receive Rs. The money required for the expansion programme is Rs. A company wants to set-up a reserve which will help it to have an annual equivalent amount of Rs. Find the single-payment that must be made as the reserve amount now.
An automobile company recently advertised its car for a down payment of Rs. Alternatively, the car can be taken home by customers without making any payment, but they have to pay an equal yearly amount of Rs. Suggest the best alternative to the customers. A company takes a loan of Rs.
Find the equal installment amount that should be paid for the next 20 years. A bank gives loan to a company to purchase an equipment which is worth of Rs. This amount should be repaid in 25 yearly equal installments. A working woman is planning for her retired life. She has 20 more years of service. Find the total amount at the end of the 15th year of the above series. Consider the following cash flow diagram.
A person is planning for his retired life. Interest Formulas and Their Applications 41 A person invests a sum of Rs. The compounding is monthly. Find the maturity amount of the deposit after 15 years. Then, depending on the type of decision, the best alternative will be selected by comparing the present worth amounts of the alternatives. The sign of various amounts at different points in time in a cash flow diagram is to be decided based on the type of the decision problem.
In a cost dominated cash flow diagram, the costs outflows will be assigned with positive sign and the profit, revenue, salvage value all inflows , etc. The costs outflows will be assigned with negative sign. In case the decision is to select the alternative with the minimum cost, then the alternative with the least present worth amount will be selected.
On the other hand, if the decision is to select the alternative with the maximum profit, then the alternative with the maximum present worth will be selected. S R1 R2 R3. The interest rate is i, compounded annually. S is the salvage value at the end of the nth year.
If we have some more alternatives which are to be compared with this alternative, then the corresponding present worth amounts are to be computed and compared. Finally, the alternative with the maximum present worth amount should be selected as the best alternative. Finally, the alternative with the minimum present worth amount should be selected as the best alternative.
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 Table 4. Table 4. Therefore, technology 2 is suggested for implementation to expand the production. Alpha Elevator Inc. Solution Bid 1: Alpha Elevator Inc.
The cash flow diagram of bid 1 is shown in Fig. Hence, bid 1 is to be selected for implementation. That is, the elevator from Alpha Elevator Inc. Which proposal should be selected? The cash flow diagram of proposal A is shown in Fig. The cash flow diagram of the proposal B is shown in Fig. Therefore, select proposal B. If it is purchased under down payment, the cost of the machine is Rs.
Solution There are two alternatives available for the company: 1. Down payment of Rs. The cash flow diagram of the second alternative is shown in Fig. If solution manual is not available then please give the link to download only answers of the exercise questions of this book. Get engineering economics r panneerselvam I have searched a lot on the internet but could not find the solution manual engineering economics by r panneerselvam solution manual the above mentioned book.
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In most computations an interest rate must be used. It is often called the Minimum Attractive Rate of Return MARR to indicate that this is the smallest interest rate, or rate of return, at which one is willing to invest money. Fixed input. The amount of money or other input resources is fixed. Fixed output. There is a fixed task, or other output to be accomplished. Example : A mechanical contractor has been awarded a fixed price contract to air-condition a building.
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