Engineering Economics & Cost Analysis

1 A Course Material onEngineering Economics & Cost , OFMECHANICAL ENGINEERINGSASURIE COLLEGE OF ENGINEERINGVIJAYAMANGALAM 638056 QUALITY CERTIFICATEThis is to certify that the e-coursematerialSubject Code:MG 2451 Subject: Engineering Economics & Cost AnalysisClass:IV YearMechBeingprepared by me and it meets the knowledge requirement of the university of the AuthorName:R. SIBY., :ASSISTANT PROFESSORThis is to certify that the coursematerial being prepared by , of adequate quality. Hehasreferred more than five booksamongthem minimum one is of SIVAKUMAR., NOTOPICSPAGE \ VALUE or buy Engineering and their value of payment compound amount payment present worth payment series sinking fund payment series paymentpresent worth payment series capital recovery gradient series annual equivalent interest rate31 CONTENTSUNIT III CASH FLOWSL NOTOPICSPAGE of comparison of worth method (Revenue dominated cash flow diagram), worth method (Revenue dominated cash flow diagram) worth method (Cost dominated cash flowdiagram) equivalent method (Revenue dominated cash flow diagram) equivalent method(Cost dominated cash flow diagram)

2 Of return method36 UNIT IV REPLACEMENT AND and maintenance of of replacement of economic life of an of an asset with a new recovery with return andconcept of challenger and probabilistic model for items which fail completely55 UNIT V line method of method of of the years digits method of fund method of output method of of public adjusted to adjust of alternatives and determination of economic life of asset70* * * * *6 Tutorial problems and Worked out examples717 Question Bank848 Previous yearUniversity questions92 TEXT BOOKS:1. Panneer Selvam, R, Engineering Economics , Prentice Hall of India Ltd, New Delhi, Engineering Economics AND COST ANALYSISL T P C3 0 0 3 OBJECTIVES:To learn about the basics of Economics and cost Analysis related to Engineering so as to take economically I INTRODUCTION TO ECONOMICS8 Introduction to Economics -Flow in an economy, Lawof supply and demand, Concept of Engineering Economics Engineering efficiency, Economic efficiency, Scope of Engineering Economics -Element of costs, Marginal cost,Marginal Revenue, Sunk cost, Opportunity cost, Break-even Analysis -V ratio, Elementary economic Analysis Material selection for product Design selection for a product, Process II VALUE ENGINEERING10 Make or buy decision, Value Engineering Function, aims, Valueengineering procedure.

3 Interest formulaeand their applications Time value of money, Single payment compound amount factor, Single payment presentworth factor, Equal payment series sinking fund factor, Equal payment series payment Present worth factor-equal payment series capital recovery factor-Uniform gradient series annual equivalent factor, Effective interest rate,Examples in all the III CASH FLOW9 Methods ofcomparison of alternatives present worth method (Revenue dominated cash flow diagram), Futureworth method (Revenue dominated cash flow diagram, cost dominated cash flow diagram), Annual equivalentmethod (Revenue dominated cash flow diagram, cost dominated cash flow diagram), rate of return method,Examples in all the IV REPLACEMENT AND MAINTENANCEANALYSIS9 Replacement and Maintenance Analysis Types of maintenance, types of replacement problem, determination ofeconomic life of an asset, Replacement of an asset with a new asset capital recovery with return and concept ofchallenger and defender, Simple probabilistic model for items which fail V DEPRECIATION9 Depreciation-Introduction, Straight line method of depreciation, declining balance method of depreciation-Sumof the years digits method of depreciation, sinking fund method of depreciation/ Annuity method ofdepreciation, service output method of depreciation-Evaluation of public alternatives-introduction, Examples,Inflation adjusted decisions procedure to adjust inflation.

4 Examples on comparison of alternatives anddetermination of economic life of : 45 PERIODSTEXT BOOKS:1. Panneer Selvam, R, Engineering Economics , Prentice Hall of India Ltd, New Delhi, Suma Damodaran, Managerial Economics , Oxford university press :1. Chan , Contemporary Engineering Economics , Prentice Hall of India, Newman, , Engineering Economics and Analysis , Texas, 20023. Degarmo, , Sullivan, and Canada, , Engineering Economy , Macmillan,New York, 19844. , , and Leavenworth, , Principles of EngineeringEconomy , Ronald Press, New York, Smith, , Engineering Economy ,Lowa State Press, Iowa, Truett & Truett, Managerial Economics - Analysis , problems & cases Wiley India 8 Thedition Luke M Froeb / Brian T Mccann, Managerail Economics A problem solvingapproach Thomson learning Economics & COST ANALYSISSCE1 Department of Mechanical EngineeringUNIT I-INTRODUCTION TO functioning of anybusinessorganizationwouldenableittopr ovidegoods/services at a lower the process of managing organizations, the managers at different levels should takeappropriate economic decisions which will help in minimizing investment, operating andmaintenance expenditures besides increasing the revenue.

5 Savings and such other gains of can be achieved through Engineering Economics which deals with the methodsthat enable one to make economic decisions towards minimizing costs of engineeringeconomics. Later,elementsofcostandbreak-evenanalysi sare a study of economic problems of the people concerning production,consumption, exchange and distribution of is the science that deals with the production and consumption of goods andservices and the distribution and rendering of these for human following are the economic goals. A high level of employment Price stability Efficiency An equitable distribution of income in economyThe flow of goods, services, resources and money payments in a simpleeconomyHouseholds and businesses are the two major entities in a simple economy. Business organizations use various economic resources like land, labour and capitalwhich are provided by households to produce consumer goods and services whichwill be used by them.

6 Business organizations make payment of money to the households for receivingvarious Economics & COST ANALYSISSCE2 Department of Mechanical Engineering Thehouseholdsinturnmakepaymentofmoneytob usinessorganizationsforreceivingconsumer goodsandservices. Thiscycleshowstheinterdependencebetweent hetwomajorentitiesina servicesConsumergoods, , ,rents,wages,salaries,interestandprofitE conomicResources:Land,labour, ,services, of supplyand Laws of supply-states that the quantity of a commodity supplied varies directly withthe price, other determinants of supply remaining constant. Ifthecostofinputsincreases,thennaturally ,thecostoftheproductwillgoup. Insuchasituation,attheprevailingpriceoft heproducttheprofitmarginper unitwillbeless. Theproducerswillthenreducetheproductionq uantity,which in turn will affectthe supply of the product. For instance, if the prices of fertilizers and cost of labour are increasedsignificantly, in agriculture, the profit marginperbagofpaddywillbereduced.

7 So,thefarmerswillreducethearea of cultivation, and hence the quantity ofsupply of paddy will be reduced at the prevailingpricesofthepaddy. If there is an advancement in technology used in the manufacture of the product inthe long run, there will be a reduction in the production cost per unit. This will enable the manufacturer to have a greater profit margin per unit at theprevailing price of the product. Hence, the producer will be tempted to supplymorequantitytothemarket. Weatheralso has a direct bearing on the supply of products. For example, demandfor woollen products will increase during means the prices of woollengoods will be incresed in winter. So, naturally, manufacturers will Economics & COST ANALYSISSCE3 Department of Mechanical EngineeringPriceFactors influencing supplyThe shape of the supply curve is affected by the following factors: Cost of the inputs Technology Weather Prices of related of demandstates that other things beingequal demand when price falls andcontracts when price rises.

8 Market demandis the total quantity demanded by all the purchasers together. Elasticity of Demand-Elasticity of demand may be defined as the degree ofresponsiveness of quantity demanded to a Change in price. An 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.. From Fig. it is clear that when there is a decrease inthe price of a product, thedemand for the product increases and its supply decreases. Also, the product is more in demand and hence the demand of the productincreases. At the same time, lowering of the price of the product makes the producers restrainfrom releasing more quantities of the product in the market. Hence, the supply of the product is decreased. The point of intersection of thesupply curve and the demand curve is known as the equilibrium point.

9 At the price corresponding to this point, the quantity of supply is equal to thequantity of demand. Hence, this point is called the equilibrium Economics & COST ANALYSISSCE4 Department of Mechanical EngineeringFactors influencing demandThe shape of the demand curve is influenced by the following factors: Income of the people Prices of related goods Tastes of of Engineering Economics Science is a field of study where the basic principles of different physicalsystemsare formulated and tested. Engineering is the application of science. It establishes varied applicationsystems based on different scientific principles. From the discussions in the previous section, it is clear that price has a major rolein deciding the demand and supply of a product. Hence, from the organization s point of view, efficient and effective functioning ofthe organization would certainly help it to provide goods/services at a lower costwhich in turn will enable it to fix a lower price for its goods or services.

10 The following section discusses the different types of efficiency and their impacton the operation of businesses and the definition and scope of can be classified into technical efficiency and economic maybeadieselengine,amachineworkinginasho pfloor,afurnace, (%)=Output 100 InputThetechnicalefficiencyofadieselengi neisasfollows:Heat equivalent of mechanicalTechnical efficiency(%)=energy produced 100 Heat equivalent of fuel usedMG2451 ENGINEEERING Economics & COST ANALYSISSCE5 Department of Mechanical EngineeringInpractice,technicalefficienc ycanneverbemorethan100%.Thisismainly duetofrictionallossandincompletecombusti onoffuel,whichareconsidered (%)=Output 100=Worth 100 InputCost Worth istheannualrevenuegeneratedbywayofoperat ingthebusinessand cost the survival and growth of any business, the economic efficiencyshould be more than100%.Economicefficiencyisalsocalled productivity.