ENGINEERING ECONOMICS

1 R. PanneerselvamR. PanneerselvamEngineering EconomicsEngineering EconomicsEngineering EconomicsNEW DELHI-1100012012R. PanneerselvamProfessorSchool of ManagementPondicherry UniversityRs. ECONOMICSby R. Panneerselvam 2001 by PHI Learning Private Limited, New Delhi. All rights reserved. No partof this book may be reproduced in any form, by mimeograph or any other means,without permission in writing from the export rights of this book are vested solely with the , 2012 Published by Asoke K. Ghosh, PHI Learning Private Limited, M-97, ConnaughtCircus, New Delhi-110001 and Printed by Meenakshi Art Printers, Great-Grand-fatherCONTENTSvPrefaceix1. INTRODUCTION1 ECONOMICS Flow in an Economy Law of Supply and Demand Concept of ENGINEERING Types of Definition and Scope of ENGINEERING ECONOMICS Elements of Other Marginal Marginal Sunk Cost Opportunity Cost Break-Even Analysis Profit/Volume Ratio (P/V Ratio) 12 Questions 132.

2 ELEMENTARY economic ANALYSIS15 Examples for Simple economic Analysis Material Selection for a Product/Substitutionof Raw Design Selection for a Product Building Material Selection Process Planning/Process Modification 22 Questions 243. INTEREST FORMULAS AND THEIR APPLICATIONS26 Time Value of Money Interest Single-Payment Compound Amount Single-Payment Present Worth Equal-Payment Series Compound Equal-Payment Series Sinking Fund Equal-Payment Series Present Worth Equal-Payment Series Capital Recovery Amount Uniform Gradient Series Annual Equivalent Amount Effective Interest Rate Bases for Comparison of Alternatives 38 Questions 394. PRESENT WORTH METHOD OF COMPARISON42 Revenue-dominated Cash Flow Cost-dominated Cash Flow Examples44 Questions 525.

3 FUTURE WORTH METHOD55 Revenue-dominated Cash Flow Cost-dominated Cash Flow Examples56 Questions 666. ANNUAL EQUIVALENT METHOD68 Revenue-dominated Cash Flow Cost-dominated Cash Flow Alternate Approach Examples70 Questions 857. RATE OF RETURN METHOD88 Examples89 Questions 978. REPLACEMENT AND MAINTENANCE ANALYSIS100 Types of Types of Replacement Problem Determination of economic Life of an Replacement of Existing Asset with a New Capital Recovery with Return Concept of Challenger and Defender Simple Probabilistic Model for Items Which Fail Completely 118 Questions123 Contentsvii9. DEPRECIATION126 Methods of Straight Line Method of Depreciation Declining Balance Method of Depreciation Sum-of-the-Years-Digits Method of Depreciation Sinking Fund Method of Service Output Method of Depreciation134 Questions13410.

4 EVALUATION OF PUBLIC ALTERNATIVES137 Examples138 Questions14411. INFLATION ADJUSTED DECISIONS147 Procedure to Adjust Inflation Inflation Adjusted economic Life of Limitation of Existing Model Life Determination without Inflationary economic Life Determination with Inflationary Effect 151 Questions15712. INVENTORY CONTROL158 Purchase Model with Instantaneous Replenishment and withoutShortages Manufacturing Model without Purchase Model with Shortages (Instantaneous Supply) Manufacturing Model with Shortages164 Questions16713. MAKE OR BUY DECISION168 Criteria for Make or Buy Approaches for Make or Buy Simple Cost Analysis economic Analysis Break-even Analysis 172 Questions17414.

5 PROJECT MANAGEMENT176 Phases of Project Management Guidelines for Network Construction Critical Path Method (CPM) Gantt Chart/Time Chart PERT (Project Evaluation and Review Technique) 187 Questions19015. VALUE ANALYSIS / VALUE ENGINEERING192 When to Apply Value Analysis Value Analysis vs. Value ENGINEERING Value ENGINEERING Advantages and Application Areas 198 Questions19816. LINEAR PROGRAMMING199 Development of LP Graphical Simplex Method 204 Questions210 REFERENCES213 APPENDIX INTEREST TABLES215 285 INDEX287 289 PREFACEE fficient functioning of any business organization would enable it to providegoods/services at a lower price. In the process of managing organizations, themanagers at different levels should take appropriate economic decisions whichwill help in minimizing investment, operating and maintenance expendituresbesides increasing the revenue, savings and such other gains of the can be achieved through ENGINEERING ECONOMICS which deals with themethods that enable one to make economic decisions towards minimizing costsand/or maximizing benefits to business book on ENGINEERING ECONOMICS is the outgrowth of my several yearsof teaching postgraduate courses in industrial ENGINEERING and productionengineering and a year of teaching water resources management (all at AnnaUniversity, Chennai).

6 It is intended as a text for these disciplines. It can also beused as a text for the undergraduate ENGINEERING courses and as a reference formanagement (project management) and commerce (financial management)courses. Besides, professional engineers and project consultants undertakingeconomic decision analysis would find the book have tried not only to give a comprehensive coverage of the variousaspects of ENGINEERING economic analysis but provided an exhaustive appendixon Interest Tables for a wide range of interest rates ( 50%) and a periodranging from one year to 100 years. These tables, along with the topicsdiscussed, will, I believe, help both students and teachers in carrying outeconomic analysis and solving book contains about 100 well-structured worked-out examples toillustrate the concepts explained.

7 Each chapter also has a set of questions andproblems to test the student s power of comprehending the wish to thank Prof. Dr. Balasubramanian, formerly Head of theDepartment of Industrial ENGINEERING Division of Anna University, who gave methe opportunity of teaching the subject to Industrial ENGINEERING classcontinuously for seven years during my stay there as a faculty. This enabled meto enrich my knowledge and expertise in the subject. Many of my colleaguesand academic friends helped me by giving valuable suggestions on the structureand content of this text and these were instrumental in improving the quality andpresentation of this book. I wish to express my profound gratitude andappreciation to all of suggestions for improving the contents would be warmly PanneerselvamixThis chapter discusses the elements of ECONOMICS and the interaction betweenits various components.

8 This is followed by an analysis of the need and scopeof ENGINEERING ECONOMICS . Later, elements of cost and break-even analysis ECONOMICSE conomics is the science that deals with the production and consumption ofgoods and services and the distribution and rendering of these for following are the economic goals. A high level of employment Price stability Efficiency An equitable distribution of income GrowthSome of the above goals are interdependent. The economic goals are not alwayscomplementary; in many cases they are in conflict. For example, any move tohave a significant reduction in unemployment will lead to an increase Flow in an EconomyThe flow of goods, services, resources and money payments in a simpleeconomy are shown in Fig.

9 Households and businesses are the two majorentities in a simple economy. Business organizations use various economicresources like land, labour and capital which are provided by householdsto produce consumer goods and services which will be used by organizations make payment of money to the households forreceiving various resources. The households in turn make payment ofmoney to business organizations for receiving consumer goods and cycle shows the interdependence between the two major entities in asimple Law of Supply and DemandAn interesting aspect of the economy is that the demand and supply of a productare interdependent and they are sensitive with respect to the price of thatproduct.

10 The interrelationships between them are shown in Fig. Fig. it is clear that when there is a decrease in the price of aproduct, the demand for the product increases and its supply decreases. Also, theproduct is more in demand and hence the demand of the product increases. Atthe same time, lowering of the price of the product makes the producers restrainfrom releasing more quantities of the product in the market. Hence, the supplyof the product is decreased. The point of intersection of the supply curve andthe demand curve is known as the equilibrium point. At the price correspondingto this point, the quantity of supply is equal to the quantity of demand. Hence,this point is called the equilibrium influencing demandThe shape of the demand curve is influenced by the following factors: Income of the people Prices of related goods Tastes of consumersIf the income level of the people increases significantly, then theirpurchasing power will naturally improve.