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Transcript of ES 91 Pastexams
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[1]Set A
1. a) Engineering Economy is the analysis and evaluation of the factors that will aect
the economic success of engineering projects to the end that a recommendation can
e made which will insure the est use of capital.
) !nelastic demand occurs when a decrease in the selling price produces a less thanproportionate increase in sales.
c) An interest rate is the rate at which interestis paid y a orrower for the use of money
that they orrow from a lender. Speci"cally# the interest rate $!%m) is a percent of principal $!)
paid at some rate $m). &or e'ample# a small company orrows capital from a an( to uy
new assets for their usiness# and in return the lender receives interest at a predetermined
interest rate for deferring the use of funds and instead lending it to the orrower. !nterest
rates are normally e'pressed as a percentageof the principalfor a period of one year
d) ompound interest is the sum of the capital plus the total amount of interest accumulated
in previous periods. *hus compound interest means interest on top of interest. A an(
account# for e'ample# may have its interest compounded every year+ in this case# an
account with ,1--- initial principal and -/ interest per year would have a alance of
,1-- at the end of the "rst year# ,100- at the end of the second year# and so on.
e) iscount on a negotiale paper is the dierence etween the present worth$ the amount
received for the paper in cash) and the worth of the paper at some time in the future $the
face value of the paper or principal). iscount is interest paid in advance. E'ample is that
when you orrowed ,2--- from a an( and agreed to pay the loan at the end of 3 months
and the an( discounted the loan and gave you ,0--- in cash.
,resent worth 4 the worth of money or commodity at present time. 5oney may worth
higher or lower depending on the economic staility of nation. *he amount of commodities
or services changes due to the supply and demand.
Set 6
http://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Lenderhttp://en.wikipedia.org/wiki/Percentagehttp://en.wikipedia.org/wiki/Principal_sumhttp://en.wikipedia.org/wiki/Lenderhttp://en.wikipedia.org/wiki/Percentagehttp://en.wikipedia.org/wiki/Principal_sumhttp://en.wikipedia.org/wiki/Interest -
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1. a) ,erfect competition occurs in a situation where a commodity or service is supplied
y a numer of vendors and there is nothing to prevent additional vendors entering
the mar(et. 5onopoly is the opposite of perfect competition. A perfect monopoly e'ists when
a uni7ue product or service is availale from a single vendor and that vendor can
prevent the entry of all others into the mar(et.
8ligopoly e'ists when there are so few suppliers of a product or service that actiony one will almost inevitaly result in similar action y others.
) *he law of supply and demand may e stated as follows+ 9nder conditions of
perfect competition the price at which a given product will e supplied and purchased
is the price that will result in the supply and demand eing e7ual.c) 8rdinary annuity is one where the payments are made at the end of each period.
d) the capitali:ed cost of any property is the sum of the "rst cost and the present worth of all
costs of replacement# operation and maintenance for a long time or forever.
e) Amorti:ation is any method of repaying a det# the principal and interest included# usually
y a series of e7ual payments at e7ual interval of time. E'ample + ,ensioner
[]SE* A+ ,rolem
;.
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At the end of the seventh year# he sold the ond to a friend at a price that resulted a yield of
1B/ nominal on his investment. >hat was the selling price
,DA*!A@ *F!GH!GI *88@S+
1. ,5! $,lus# 5inus# !nteresting)
A crystalli:ation of the open4minded attitude used delierately. *he treatment
of ideas # suggestions# and proposals. !nstead of just deciding whether or not you
li(e an idea# this thin(ing operation leads you to "nd the good points $,,lus)# the
ad points$55inus) and the interesting points $! !nteresting) aout an idea. *he
natural reaction to an idea is to li(e or disli(e it# to approve or disapproveJ and then
stop further evaluation. 9sing ,5! leads to a delierate operation of going eyond
natural emotional reaction to an idea# to enlarge the view of a situation.
,rinciples+
A. ,5! is important ecause without it you may reject a valuale idea that seems
ad at "rst sight.
6. >ithout a ,5! you are very unli(ely to see the disadvantages of an idea that you
li(e very much.
. ,5! can show that ideas are not just good or ad ut can also e interesting if
they lead to other ideas.
. >ithout ,5! major judgements are ased not on the value of the ideas itself uton your emotions at that time.
E. >ith a ,5! # you decide whether or not you li(e the idea after you have e'plored
it instead of efore.
,ractice e'amples+
1. All the seats should e ta(en out of uses
. >indows should e made of transparent plastic instead of glass.
. K S + onse7uence and Se7uel
KS is a crystalli:ation of the process of loo(ing ahead to see theconse7uences of some action# plan# decision# rule# invention etc. KS goes eyond
A what may happen after the decision has een made. !mmediate conse7uences
as well as short4term $ 142 years)# medium4term $242 years) and long term
conse7uences $over 2 years). *he intention is to enlarge the view eyond
immediate eect of that action. An action may seem worthwhile if the immediate
eect is good. 6ut if one ma(es a delierate eort to loo( at longer term
conse7uences# the action may not e worthwhile at all and vice versa.
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,rinciples+
A. 8ther people may e ale to see the conse7uences of your action more easily
than you can yourself.
6. !t is important to (now whether the conse7uences are reversile or not.
. *he immediate conse7uences may e good and long4term conse7uences ad or
the other way around..
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. 8jectives should e near enough# real enough and possile enough for a
person to really try to reach them
E. *here may e many ojectives# ut some are more important than others.
,ractice e'amples+
1. AI8 of politician vs. usiness e'ecutive
. AI8 of school principal;. !n respect to food# AI8 of homema(er# coo( in restaurant# food manufacturer#
farmer# government.
[] SE* A + e"nition
1.E,DE!A*!8G
4is the decrease in the value of physical property with the passage of time.
a) ,urpose of epreciation
1. *o provide for the recovery of capital which has een invested in physical property.. *o enale the cost of depreciation to e charged to the cost of producing products
or services that result from the use of the property.
) *ypes of epreciation
1. Gormal epreciation
a. physical L is due to the lessening of the physical aility of a property to produce
results. !tMs common causes are wear and deterioration.
. functional L is due to the lessening in the demand for the function which the
property was designed to render. !tMs common causes are inade7uacy# changes in styles#
population center shift# saturation of mar(ets# or more eNcient machines are produced.
. epreciation due to changes in price levels L is almost impossile to predict and
therefore is not considered in economy studies
;. epletion L refers to the decrease in the value of a property due to the gradual
e'traction of its contents.
c) De7uirements of a depreciation method
1. !t should e simple.
. !t should recover capital
;. *he oo( value will e reasonaly close to the mar(et value at any time
0. *he method should e accepted y the 6ureau of !nternal Devenue.
d) *he Straight line method
4*his method assumes that the loss in value is directly proportional to the age of the
property.
d $o L l)%@
n n$o4l)%@n o4n
e. Sin(ing fund
4*his method assumes that a sin(ing fund is estalished in which funds will
accumulate for replacement. *he total depreciation that has ta(en place up to any given
time is assumed to e e7ual to the accumulated amount in the sin(ing fund at that time.
d $o L l)%$&%A# i/#@)
n d$&%A# i/# n)
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n o4n
f. eclining alance
!n this method# sometimes called the constant percentage method or the 5atheson
&ormula# it is assumed that the annual cost of depreciation is a "'ed percentage of the
salvage value at the eginning of the year. *he ratio of the depreciation in any year to the
oo( value at the eginning of that year is constant throughout the life of the property and
is designated y ( the rate of depreciation. *his method does not apply# if the salvage value
is :ero# ecause ( will e e7ual to one and d1 will e e7ual to o.
dndepreciation during the nth year
dn$o$14()Cn41)(
n o$14()Cn o $l%o)Cn%@
l o$14()C@
( 14$n%o)C1%n 14$l%o)C@
. A,!*A@
a) E7uity apital or ownership funds are those supplied and used y the owners of an
enterprise in the e'pectation that a pro"t will e earned.
) 6orrowed funds or capital are those supplied y others on which a "'ed rate of interestmust e paid and the det must e repaid at a speci"ed time.
c. 6ond &inancing
A ond is a certi"cate of indetedness of a corporation usually for a period not less
than ten years and guaranteed y a mortgage on a certain assets of the corporation or its
susidiaries. 6onds are issued when there is need for more capital such as for e'pansion of
the plant or the services rendered y the corporation.
*he face or par value of a ond is the amount stated on the ond. >hen the face
value has een repaid# the ond is said to have een retired or redeemed. *he ond rate is
the interest rate 7uoted on the ond.
d. *he orporation L is a distinct legal entity# separate from the individuals who own it# and
which can engage in almost any type of usiness transaction in which a real person could
occupy himself or herself.
Advantages+
1. !t enjoys perpetual life without regard to any change in the person of its owners#
the stoc(holders.
. *he stoc(holders of the corporation are not liale for the dets of the corporation.
;. !t is relatively easier to otain large amounts of money for e'pansion# due to its
perpetual life.
0. *he ownership in the corporation is readily transferred.
2. Authority is easily delegated y the hiring of managers.
isadvantages
1. *he activities of a corporation is limited to those stated in its charter.. !t is relatively complicated in formation and administration.
;. *here is a greater degree of governmental control as compared to other types of
usiness organi:ations.
[] SE* 6 + e"nition
1.
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a) 5ar(et Oalue of a property4 is the amount which a willing uyer will pay to a willing seller
for the property where each has e7ual advantage and is under no compulsion to uy or sell.
) &air value is the value which is usually determined y a disinterested third party in order
to estalish a price that is fair to oth seller and uyer.
c) oo( value sometimes called depreciated oo( value is the worth of a property as shown
in the accounting records of an enterprise.
d)Salvage value or resale value is the price that can e otained from the sale of the
property after it has een used.
e. Scrap Oalue is the amount the property would sell for if disposed o as jun(.
.
a) !ndividual ownership or sole proprietorship is the simplest form of usiness organi:ation#
wherein person uses his or her own capital to estalish a usiness and is the sole owner.
Advantages of the individual ownership+
1. !t is easy to organi:e
. *he owner has full control of the enterprise.
;. *he owner is entitled to whatever ene"ts and pro"ts that accrue from the usiness.
0. !t is easy to dissolve.
isadvantages of the !ndividual 8wnership1. *he amount of e7uity capital which can e accumulated is limited.
. *he organi:ation ceases upon the death of the owner
;. !t is diNcult to otain orrowed capital# owing to the uncertainty of the life of the
organi:ation.
0. *he liaility of the owner for his dets is unlimited.
,artnership L is an association of two or more persons for the purpose of engaging in a
usiness for
pro"t.
Advantages+
1. 5ore capital may e otained y the partners pooling their resources together.
. !t is ound y few legal re7uirements as to its accounts# procedures# ta' forms and other
items of operation.
;. issolution of the partnership may ta(e place at any time y mere agreement of the
partners.
0. !t provides an easy method wherey two or more persons of diering talents may enter
into usiness# each carrying those urdens that he can est handle.
isadvantages+
1. *he amount of capital that can e accumulated is de"nitely limited.
. *he life of the partnership is determined y the life of the individual partners. >hen any
partner dies# the partnership automatically ends.
;. *here are many serious disagreement among the individual partners.
0. Each partner is liale for the dets of the partnership.
) Stoc( ownership is the practice of companies in giving their sta memers shares !n their
company as part of the salary. !t also means owning a stoc( in a company investment.
c) ommon stoc( represents ordinary ownership without special guarantees of return.
ommon stoc(holders have certain legal rights# among which are the following+
1. Oote at stoc(holdersM meeting.
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. Elect directors and delegates to them power to conduct the aairs of the usiness.
;. Sell or dissolve the corporation
0. 5a(e and amend the y laws of the corporation
2. Suject to government approval# amend or change the character or capital structure.
B. ,articipate in the pro"ts.
=. !nspect the oo(s of the corporation.
d) ,referred Stoc(
,referred stoc(holders are guaranteed a de"nite dividend on their stoc(s. !n case the
corporation is dissolved# the assets must e used to satisfy the claims of the preferred
stoc(holders efore those of the holders of the common stoc(. ,referred stoc(holders
usually have the right to vote in meetings ut not always.
e. 6ond &inancing
A ond is a certi"cate of indetedness of a corporation usually for a period not less
than ten years and guaranteed y a mortgage on a certain assets of the corporation or its
susidiaries. 6onds are issued when there is need for more capital such as for e'pansion of
the plant or the services rendered y the corporation.*he face or par value of a ond is the amount stated on the ond. >hen the face
value has een repaid# the ond is said to have een retired or redeemed. *he ond rate is
the interest rate 7uoted on the ond.
f) eclining alance
!n this method# sometimes called the constant percentage method or the 5atheson
&ormula# it is assumed that the annual cost of depreciation is a "'ed percentage of the
salvage value at the eginning of the year. *he ratio of the depreciation in any year to the
oo( value at the eginning of that year is constant throughout the life of the property and
is designated y ( the rate of depreciation. *his method does not apply# if the salvage value
is :ero# ecause ( will e e7ual to one and d1 will e e7ual to o.dndepreciation during the nth year
dn$o$14()Cn41)(
n o$14()Cn o $l%o)Cn%@
l o$14()C@
( 14$n%o)C1%n 14$l%o)C@
g) sum of the yearMs digits $S
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@ 2 years
l ,1-#---
n ;
a) 6y doule declining method
dn $%@)$o)$14%@) Cn41 $%2)$1--#---)$14%2)C ,10#0--
n o$14%@)Cn 1--#---$14%2)C; ,1#B--
) 6y Sum of the yearMs digits $S
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E. !f you do a A& on someone elseMs thin(ing you may e ale to tell the person
what has een left out.
,ractice e'amples+
1. A young couple is undecided whether to get married at once or wait. >hat factors
should they e considering
. *he sugar industry is demanding protection from foreign imports which arecoming into the country at a lower price and ta(ing over the mar(et# what factors
should the government consider in this matter.
. AI84 Aims# Ioals# 8jectives
&ocus on ,urpose + Aim is the general direction. Ioal is an ultimate destination.
8jective is a recogni:ale point of achievement along the way. >ithout a sense of
purpose# all actions are either reactions to a situation or matters of hait or
imitation.
,rinciples+
A. !f you (now e'actly what your ojectives are# it is easier to achieve them.
6. !n the same situation dierent people may have dierent ojectives.
. 8n the way to a "nal ojective# there may e a chain of smaller ojectives#
each one following from the previous one.
. 8jectives should e near enough# real enough and possile enough for a
person to really try to reach them
E. *here may e many ojectives# ut some are more important than others.
,ractice e'amples+
1. AI8 of politician vs. usiness e'ecutive
. AI8 of school principal
;. !n respect to food# AI8 of homema(er# coo( in restaurant# food manufacturer#
farmer# government.
;. E!S!8GS
6ring together in particular &!, and A, and also the other tools in a more general
way. A AI8# &!,# KS# A, and also the ,5!. *his helps to increase (nowledge of
the situation so that the decision either ma(es itself# or is at least easier to ma(e
ecause the alternatives are more numerous and the conse7uences etter de"ned.
*he "nal considerations are the personal values of the decision ma(er.
,rinciples+
A.
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E. !n ma(ing a decision# you should consider all factors$A&)# loo( at the
conse7uences $KS)# e very clear aout ojectives $AI-)# and assess the
priorities$&!,). And "ll all the possile alternatives$A,). >hen you have done this# a
decision may e much easier.
,ractice E'amples+
1. Fow do people decide to spend their money. A young woman has two oys# one of them is 7uite and hardwor(ing. *he other is
the etter loo(ing and more fun ut rather unreliale. 6oth want to marry her. She
has to decide.
[;] Set A46+
SET A
a SCIENCE, a term derived from @atin word Rscientia# is a systemati:ed ody of
(nowledge ased on facts and events of life arranged according to order. !t is a
system of gaining (nowledge ased on a scienti"c method which has the followingsteps+ uniased oservations# formulation of hypothesis# gathering of data#
systematic e'perimentation# analysis of data and conclusion. !t aims to give etter
understanding of current phenomena and a etter aility to infer future events. !t
e'presses general truths and principles to e'plain how things wor(.
ENGINEERING is an applied science. !t aims to solve prolems to improve the status
7uo. !t can also e de"ned as the optimal conversion of the natural resources to
products that will ma(e for optimum and safe utili:ations of humans. !t solves
prolems not just y e'plaining ut y actually designing and manufacturing
products# engines and devices which will last for a long time and under a
speci"cation of safety.
c PRESENT ECONOMY PROBLEMS
There are many cases in engineering economy stuies !here
interest is not a "actor, these stuies are "re#uent$y ca$$e %resent economy
%ro&$ems' Such stuies usua$$y in(o$(e the se$ection &et!een a$ternati(e
esigns, materia$s, or methos'
RATE O) RET*RN +ROR MET-O.
The rate o" return on the ca%ita$ in(este is gi(en &y the
"ormu$a,
Rateof return=net annual profit
capital invested
Rate o" return is a measure o" e/ecti(eness o" an in(estment o"
ca%ita$' It is a 0nancia$ e1ciency' 2hen this metho is use, it is necessary to
ecie !hether the com%ute rate o" return is su1cient to 3usti"y the in(estment'
The a(antage o" this metho is that it is easi$y unerstoo &y management an
in(estors' The a%%$ications o" the rate o" return metho is contro$$e &y the
"o$$o!ing conitions' A sing$e in(estment o" ca%ita$ at the &eginning o" the 0rst
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year o" the %ro3ect $i"e an ientica$ re(enue an cost ata "or each year' The
ca%ita$ in(este is the tota$ amount o" ca%ita$ in(estment re#uire to 0nance the
%ro3ect, !hether e#uity or &orro!e'
e PRESENT 2ORT- +P2 MET-O.
This %attern "or economy stuies is &ase on the conce%t o" %resent !orth' I" the%resent !orth' I" the %resent !orth o" the net cash 4o!s is e#ua$ to, or greater
than, 5ero, the %ro3ect is 3usti0e economica$$y' The %resent !orth metho is
4e6i&$e an can &e use "or any ty%e o" economy stuy' It is use e6tensi(e$y in
ma7ing economy stuies in the %u&$ic !or7s 0e$, !here $ong8$i(e structures are
in(o$(e'
SET B
f SCIENCE, a term derived from @atin word Rscientia# is a systemati:ed ody of
(nowledge ased on facts and events of life arranged according to order. !t is a
system of gaining (nowledge ased on a scienti"c method which has the following
steps+ uniased oservations# formulation of hypothesis# gathering of data#systematic e'perimentation# analysis of data and conclusion. !t aims to give etter
understanding of current phenomena and a etter aility to infer future events. !t
e'presses general truths and principles to e'plain how things wor(.
g ENGINEERING is an applied science. !t aims to solve prolems to improve the status
7uo. !t can also e de"ned as the optimal conversion of the natural resources to
products that will ma(e for optimum and safe utili:ations of humans. !t solves
prolems not just y e'plaining ut y actually designing and manufacturing
products# engines and devices which will last for a long time and under a
speci"cation of safety.
h ANN*AL 2ORT-. !n this method# interest on the original investment $sometimescalled minimum re7uired pro"t) is included as the cost. !f the e'cess of annual cash
inTows over annual cash out Tows is not less than :ero the proposed investment is
justi"ed L is valid. *his method is covered y the same limitations as the rate of
return pattern a single initial investment of capital and uniform revenue and cost
throughout the life of investment.
i )*T*RE 2ORT-' *he future worth method for economy studies is e'actly
comparale to the present worth method e'cept that all cash inTows and outTows
are compounded forward to a reference point in time called the future. !f the future
worth of the net cash Tows is e7ual to# or greater than# :ero# the project is justi"ed
economically.
j PAYBAC9 PERIO.' *he payac( period is commonly de"ned as the length of time
re7uired to recover the "rst cost of an investment from the net cash Tow produced y
that investment for an interest rate of :ero
!nvestment L salvage value,ayout period $years)
Get annual cash Tow
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h.) E8G85!S is the social science that deals with the production# distriution# and
consumption of goods and services and with the theory and management of economies oreconomic systems. !t is also the theories#principles# and modelsthat dealwith how
themar(etprocesswor(s.!t attemptsto e'plain how wealthis created and distriutedin communities# how people allocateresourcesthat are scarce and have many
alternative uses#and other such mattersthat arise in dealingwith human wantsand
their satisfaction.
[0] SE* A4e"nition
1.
a)apitali:ed 5ethod
*he capitali:ed cost method is a variation of the present worth cost pattern. *his
method is used for alternatives having long lives. *o use the method# determine the
capitali:ed cost of all the alternatives and choose that one with the least capitali:ed cost.
) Annual cost method
*o apply this method# the annual cost of the alternatives including interest oninvestment is determined. *he alternative with the least annual cost is chosen. *his pattern#
li(e the rate of return on additional investment pattern# applies only to alternatives which
has a uniform cost data for each year and a single investment of capital at the eginning of
the "rst year of the project life.
c) E7uivalent 9niform Annual ost 5ethod
!n this method# all cash Tows$irregular or uniform) must e converted to an
e7uivalent uniform annual cost# that is# a year4end amount which is the same each year. *he
alternative with the least e7uivalent uniform annual cost is preferred. >hen the E9A
method is used# the e7uivalent uniform annual cost of the alternatives must e calculated
for one life cycle only. *his method is Te'ile and can e used for any type of alternative
selection prolems. *he method is a modi"cation of the annual cost pattern.
d. Oariale cost
Oariale costs are those costs which vary with output or any change in the
activities of an enterprise. 9nli(e "'ed costs# which remain constant regardless of output#
variale costs are a direct function of production volume# rising whenever production
e'pands and falling whenever it contracts. E'amples of common variale costs include raw
materials# pac(aging# and laor directly involved in a companyUs manufacturing process. &or
e'ample# a "rm pays for raw materials. >hen activity is decreased# less raw material is
used# and so the spending for raw materials falls. >hen activity is increased# more raw
material is used and spending therefore rises. Gote that the changes in e'penses happen
with little or no need for managerial intervention. *hese costs are variale costs.
e) 5arginal cost
5arginal cost is the additional cost of producing one more unit of a product. *hat
is# it is the cost of producing one more unit of a good. !f producing additional vehicles
re7uires# for e'ample# uilding a new factory# the marginal cost of those extravehicles
includes the cost of the new factory.
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f) !ncrement cost
!ncrement costs are those that arise as the result of a change in operations or
policy. A very simple e'ample would e a factory ma(ing widgets where it ta(es one
employee an hour to ma(e a widget. As a simple "gure# the incremental cost of a widget
would e the wages for the employee for an hour plus the cost of the materials needed to
produce a widget.
g) Sun( ost
Sun( ost represents money which has een spent or capital which has een
invested and which cannot e recovered due to certain reasons. &or e'ample# if a "rm sin(s
V1 million on an enterprise software installation# that cost is Wsun(W ecause it was a one4
time thing and cannot e recovered once e'pended.
SE* A4,rolem
A company is considering two types of e7uipment for its manufacturing plant. ,ertinent data
are as follows+
*ype A *ype 6
&irst cost ,--#--- ,;--#---Annual 8perating cost ,;#--- 0#---
Annual laor cost ,2-#--- ;#---
!nsurance and property ta'es ;/ ;/
-.-;$&irst cost) -.-;$&irst ost)
,B#--- ,3#---
,ayroll ta'es 0/ 0/
-.-0$Annual laor cost)
,#--- ,1#?-
Estimated life 1- yrs 1- yrs
!f the minimum re7uired rate of return is 12/# which e7uipment should e selected
1
a.) 6y D8D on additional investment method
*ype A
Annual osts+
epreciation &irst ost%$&%A#12/#1-) --#---%-.;-;= ,3#?2-
8peration ,;#---
@aor ,2-#---
,ayroll ta'es -.-0$Annual laor cost) 2----$-.-0) #---
*a'es K !nsurance -.-;$&irst cost) $,--#---)$-.-;) ,B#---
*otal Annual ost ,33#?2-
*ype 6
Annual osts+
epreciation &irst ost%$&%A#12/#1-) ;--#---%-.;-;= ,10#==B
8peration ,0#---
@aor ,;#---
,ayroll ta'es -.-0$Annual laor cost) ;---$-.-0) ,1#?-
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*a'es K !nsurance -.-;$&irst cost) $,;--#---)$-.-;) ,3#---
*otal Annual ost ,?1# -2B
Annual Savings ,33#?2- L ,?1#-2B ,1?#=30
Additional !nvestment ,;--#--- L ,--#--- ,1--#---
Date of Deturn on Additional !nvestment ,1?#=30$1--)%,1--#--- 1?.=3 X 12/
*ype 6 should e selected.
.) ,resent >orth ost 5ethod
*ype A
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q ,ayroll
ta'esQ !nsurance and property ta'es
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q-.-0$Annual laor cost) Q -.-;$&irst cost) ,3-#---
,>a &irst cost Q Annual cost$,%A# 12/#1-) ,--#--- Q $3-#---)$2.-1??) ,B21#B3
*ype 6
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q ,ayroll
ta'esQ !nsurance and property ta'es
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q
-.-0$Annual laor cost) Q -.-;$&irst cost) ,BB#?-
,> &irst ost Q Annual cost $,%A# 12/# 1-) ;--#--- Q $BB#?-)$2.-1??) ,B;#B0B
Since ,> Y ,>a for the same period of time# type 6 should e selected.
.
Iiven+
11#--- units%year ,1;%unit
E7uipment cost+, 1-#---
8ther e7uipment+ ,#---
@aor cost+ ,2%unit
5aterial cost+ ,0%unit*a'es and insurance + ;/
8verhead cost+ -/
8perating and maintenance+ ,3#---
apital cost+ 1B/
Solution+
Annual revenue 11#--- units%yr $,1;%unit)
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Annual revenue ,10;#---
Annual cost+
8ther e7uipment+ ,#---
@aor cost+ ,2%unit$11#---units%yr) ,22#---
5aterial cost+ ,0%unit$11#---units%yr) ,00#---
*a'es and insurance + -.-;$e7uipment cost) -.-;$1-#---),;#B--
8verhead cost+ -.$laor cost) -.$22#---) ,11#---
8perating and maintenance+ ,3#---
apital cost+ -.1B$e7uipment cost)-.1B$1-#---),13--
epreciation e7uipment cost% $&%A# 1B/#2) ,1=#2--
Annual cost ,1B1#;--
Annual Devenue L Annual ost 4,1?#;--
*herefore# this opportunity should not e acceptedZ
[0] SE* 6+ e"nition
a. Date of Deturn on additional investment method
*he formula for the rate of return on additional investment is#
Date of return on additional investment annual net savings%additional investment
!f the rate of return on additional investment is satisfactory# then# the alternative re7uiring a
igger investment is more economical and should e chosen.
. Annual ost 5ethod
*o apply this method# determine the annual cost of each alternative including the interest
on capital%investment. hoose the alternative which has a least annual cost. *his pattern#
li(e the rate of return on additional investment pattern is applicale only to alternatives
which has a uniform cost data for each year and a single investment of capital at the
eginning of the "rst year of the project life.
c. apitali:ed 5ethod
*he capitali:ed cost method is a variation of the present worth cost pattern. *his method
is used for alternatives having long lives. *o use the method# determine the capitali:ed cost
of all the alternatives and choose that one with the least capitali:ed cost.
d. ,ayac($,ayout) ,eriod 5ethod
*o use this method# the payac( period of each alternative is computed. *he alternative
with the shortest payac( period is adopted. *his method is seldom used.
e. &i'ed costs
&i'ed costs are those costs which remain constant# whether or not a given change in
operations or policy is adopted. 9nli(e variale costs# "'ed costs are not :ero when
production is :ero. Iood e'amples of "'ed costs would e insurance# rent# periodic load
payments# interest paid# "'ed permanent employee salaries. *otal "'ed costs remain
unchanged as volume increases# while "'ed costs per unit decline. &or e'ample# if a icycle
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usiness had total "'ed costs of V1#--- and only produced one i(e# then the full V1#--- in
"'ed costs must e applied to that i(e. 8n the other hand# if the same usiness produced
1- i(es# then the "'ed costs per unit decline to V1--.
f. Oariale osts
Oariale costs are those costs which vary with output or any change in the activities of an
enterprise. 9nli(e "'ed costs# which remain constant regardless of output# variale costs
are a direct function of production volume# rising whenever production e'pands and falling
whenever it contracts. E'amples of common variale costs include raw materials#
pac(aging# and laor directly involved in a companyUs manufacturing process. &or e'ample#
a "rm pays for raw materials. >hen activity is decreased# less raw material is used# and so
the spending for raw materials falls. >hen activity is increased# more raw material is used
and spending therefore rises. Gote that the changes in e'penses happen with little or no
need for managerial intervention. *hese costs are variale costs.
g. 5arginal costs
5arginal cost is the additional cost of producing one more unit of a product. *hat is# it is
the cost of producing one more unit of a good. !f producing additional vehicles re7uires# fore'ample# uilding a new factory# the marginal cost of those extravehicles includes the cost
of the new factory.
[0 ]SE* 64,rolem
A company is considering two types of e7uipment for its manufacturing plant. ,ertinent data
are as follows+
*ype A *ype 6
&irst cost ,--#--- ,;--#---
Annual 8perating cost ,;#--- 0#---
Annual laor cost ,2-#--- ;#---!nsurance and property ta'es ;/ ;/
-.-;$&irst cost) -.-;$&irst ost)
,B#--- ,3#---
,ayroll ta'es 0/ 0/
-.-0$Annual laor cost)
,#--- ,1#?-
Estimated life 1- yrs 1- yrs
!f the minimum re7uired rate of return is 12/# which e7uipment should e selected
1. a. ) 6y e7uivalent 9niform Annual ost 5ethod
*ype A Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q
,ayroll ta'esQ !nsurance and property ta'es
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q
-.-0$Annual laor cost) Q -.-;$&irst cost) ,3-#---
E9Aa &irst cost $A%,#12/#1-) Q Annual cost $--#---)$-.133;) Q 3-#--- ,13#?B-
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*ype 6
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q
,ayroll ta'esQ !nsurance and property ta'es
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q
-.-0$Annual laor cost) Q -.-;$&irst cost) ,BB#?-
E9A &irst cost $A%,#12/#1-) Q Annual cost ,;--#---$-.133;) Q BB#?- ,1B#-=-
Since E9A Y E9Aa# type 6 is more economical.
1..) ,resent >orth ost 5ethod
*ype A
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q ,ayroll
ta'esQ !nsurance and property ta'es
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q
-.-0$Annual laor cost) Q -.-;$&irst cost) ,3-#---
,>a &irst cost Q Annual cost$,%A# 12/#1-) ,--#--- Q $3-#---)$2.-1??) ,B21#B3
*ype 6
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q ,ayroll
ta'esQ !nsurance and property ta'es
Annual osts$e'cluding depreciation) Annual operating cost Q Annual laor cost Q
-.-0$Annual laor cost) Q -.-;$&irst cost) ,BB#?-
,> &irst ost Q Annual cost $,%A# 12/# 1-) ;--#--- Q $BB#?-)$2.-1??) ,B;#B0B
Since ,> Y ,>a for the same period of time# type 6 should e selected.
.
Iiven+
11#--- units%year ,1;%unit
E7uipment cost+, 1-#---
8ther e7uipment+ ,#---
@aor cost+ ,2%unit
5aterial cost+ ,0%unit
*a'es and insurance + ;/
8verhead cost+ -/
8perating and maintenance+ ,3#---apital cost+ 1B/
Solution+
Annual revenue 11#--- units%yr $,1;%unit)
Annual revenue ,10;#---
Annual cost+
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8ther e7uipment+ ,#---
@aor cost+ ,2%unit$11#---units%yr) ,22#---
5aterial cost+ ,0%unit$11#---units%yr) ,00#---
*a'es and insurance + -.-;$e7uipment cost) -.-;$1-#---),;#B--
8verhead cost+ -.$laor cost) -.$22#---) ,11#---
8perating and maintenance+ ,3#---
apital cost+ -.1B$e7uipment cost)-.1B$1-#---),13--
epreciation e7uipment cost% $&%A# 1B/#2) ,1=#2--
Annual cost ,1B1#;--
Annual Devenue L Annual ost 4,1?#;--
*herefore# this opportunity should not e acceptedZ
[2] SE* A
. *wo electric motors are eing considered to power an industrial hoist. Each iscapale of providing 1-- hp. ,ertinent data for each motor are as follows+
5otor A
!nvestment ,2#---
Electrical eNciency ?0/
5aintenance per year 0--
@ife# years 1-
5otor 6
!nvestment ,;#---
Electrical eNciency ??/5aintenance per year B--
@ife# years 1-
5oney is worth -/. !f the e'pected usage of the hoist is =-- hours per year# what
would e the cost of electrical power have to e efore 5otor A is favored over
motor 6
Solution+
@et ' cost of electrical power for oth motors to e e7ually economical
5otor A
Annual osts+epreciation $!nvestment)%$&%A# -/# 1-) ,3B;
,ower $1--)$-.=0B)$=--)$')%-.?0 B#1B='
maintenance 0--
!nterest on capital !nvestment$-.-) 2#---
*otal annual cost ,B#;B; Q B#1B='
5otor 6
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Annual osts+
epreciation $!nvestment)%$&%A# -/# 1-) ,,1#;
,ower $1--)$-.=0B)$=--)$')%-.?? 2B#;01'
maintenance B--
!nterest on capital !nvestment$-.-) B#0--
*otal annual cost ,?; Q 23;01'
,B;B; Q ,B1B=' ?; Q 23;01'
,-.BB10 per (wh
5otor A will e more economical for electrical power cost less than ,-.BB10 per
(wh.
;. 5otor reuild+
!nvestment 2-#---
5aintenance 12#---
@ife 2 years
Gew motor
!nvestment 12-#---
5aintenance 1#---
@ife 1-
Deuild
epreciation $2-#---)%$&%A# 1B/#2) ,=#=-
5aintenance ,12#---
!nterest on investment $2-#---)$-.1B) ,?#---*otal + ;-#=-
Gew motor+
epreciation $12-#---)%$&%A# 1B/#1-) ,=#-;2
5aintenance ,1#---
!nterest on !nvestment $12-#---)$-.1B) ,0#---
*otal+ ,0;#-;2
*hus# reuild the old motor.
0. &irst cost -#---#---
!nterest B /
Annual operation and maintenance cost ,11#---#---
Annual income%ene"t B#---#---
@ife B- years
a) 6y E9A 5ethod
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Annual ene"t B#---#---
E9A -#---#---$A%,#B/#B-) Q 11#---#---
E9A 0#B1?#---
6% $ene"t)%$E9A) 1.-B X 1
*herefore# this is o(Z
.) 6y ,resent >orth 5ethod
,>ene"t B#---#--- $,%A# B/# B-)
,>ene"t 0- '1-C2
,>cost -#---#--- Q 11#---#---$,%A# B/#B-)
,>cost ;#3=?'1-C2
6% $,>ene"t)%$,>cost) 1.-B X 1.-
therefore # this is o(Z
[2]SE* 6
1.
a) Dental or lease possiilities
4!t is possile to rent identical or comparale asset or property# thus freeing
capital for other and more pro"tale use.
6) ,hysical impairment
*he e'isting asset is completely or partially worn out and will no longer
function satisfactorily without e'tensive repairs.
c. !nade7uacy
*he e'isting asset does not have suNcient capacity to meet the present
demands that is placed on it.
d. 6rea(4even analysis!n engineering economy# many situations are encountered where the cost of
two or more alternatives may e aected y a common variale. 6rea(4even point
is the value of the variale for which the costs for the alternatives will e e7ual.
1 f1$') and f$')
>here+ 1 certain speci"ed total cost applicale to alternative 1 . certain
speci"ed total cost applicale to alternative . a common independent variale
aecting alternative 1 and .
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*he rea( even point is where 1 and are e7ual # f1$')f$') which may e
solved for '# the rea( even point.
6rea(4even chart is a graphical representation of rea(4even analysis. *he rea( L
even point is the 7uantity of production at which the income is e7ual to total cost. !t
is the intersection of the income line and the total cost line on the rea( even chart.>hen two alternatives are to e compared# the rea(4even point is the intersection
of the total cost line for each alternative on the rea( even chart.
[2] Set 6+
. 8ld 5otor $Deuild)
&irst cost B-#---
@ife B years
Annual operation and maintenance 10#---
Gew 5otor&irst cost 1=-#---
@ife 11 years
Annual operation and maintenance 11#---
5oney worth 12/
Solution+
6y D8D on additional investment
8ld 5otorepreciation $&irst cost)%$&%A#12/# B) ,B#?20
Annual operation and maintenance 10#---
*otal + ,-#?20
Gew 5otor
epreciation $&irst cost)%$&%A#12/#11) B#3?
Annual operation and maintenance 11#---
*otal+ ,1=#3?
Annual Savings 8ld L Gew -#?20 L 1=3? #?=
Additional annual investment 1=-#--- L B-#--- 11-#---
D8D on additional investment $#?=%11-#---) ' 1-- .B1/ Y 12/
*herefore# the old motor should e reuilt.
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;. A local factory assemling calculators produces 0-- units per month and sells
them at ,1#?-- each. ividends are ?/ on the ?#--- shares with a par value of
,2- each. *he "'ed operating cost per month is ,2#---. 8ther costs are ,1#---
per unit. etermine the rea(4even point. !f only -- units were produced per
month# determine the pro"t or loss.
Solution +
!ncome + 1.?-- per unit
&i'ed costs ,2#--- per month
Oariale costs ,1#--- per unit
ividend ?/ per year
,ar value 2- each shares ?---
@et ' numer of calculators per month to rea( even
!ncome 1#?--'
*otal cost ,2#--- Q ,1#---'
*o rea( even#!ncome *otal cost
1#?--' 2#--- Q 1#---'
;1.2 or ; units
ividend $par value)$dividend percent)$share)%1months $2-)$-.-?)$?---)%1
,1;#;;; per month
&or -- units+
!ncome *otal cost Q ividend Q,ro"t %loss
,1#?--$--) ,2#--- Q $1#---)$--) Q 1;#;;; Q ,ro"t%loss,ro"t ,11#BB= per month
0. &irst cost -#---#---
!nterest B /
Annual operation and maintenance cost ,11#---#---
Annual income%ene"t B#---#---
@ife B- years
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a) 6y E9A 5ethod
Annual ene"t B#---#---
E9A -#---#---$A%,#B/#B-) Q 11#---#---
E9A 0#B1?#---
6% $ene"t)%$E9A) 1.-B X 1
*herefore# this is o(Z
.) 6y ,resent >orth 5ethod
,>ene"t B#---#--- $,%A# B/# B-)
,>ene"t 0- '1-C2
,>cost -#---#--- Q 11#---#---$,%A# B/#B-)
,>cost ;#3=?'1-C2
6% $,>ene"t)%$,>cost) 1.-B X 1.-
therefore # this is o(Z