Engineering Economics

“Engineering economics is the application of minimum resources to generate maximum benefits”. Justify the statement with a suitable example.

a) Elaborate nominal and effective interest rate with a suitable example. A new machine is expected to cost Rs. 6,000 and have a life of 5 years. Maintenance costs will be Rs. 1,500 the first year, Rs. 1, 700 the second year, Rs. 1, 900 the third year, Rs. 2,100 the fourth year, and Rs. 2,300 the fifth year. How much should be deposited in a fund that earns 9% per year, compounded monthly, in order to pay for this machine? [2+4] b) While you are planning to deposit Rs. 5,000 in 3 months interval for 4 years in increasing trend at a 2.5% growth rate per deposit, a bank enticing you with an interest rate of 10% per annum compounded semi-annually. What will be the equivalent equal annual deposit of that money? [4] c) How much equal withdrawals amount can be possible at 2 day interval till the coming 60 days if you just deposited Rs. 1,000 in a bank with 10% interest that compounds fortnightly?

a) From the following four mutually exclusive projects, recommend the best one using modified B/C ratio method. The study period is 5 years and MARR= 15%. Salvage Value = 20% of initial investment. [6] b) Consider the following mutually exclusive alternatives. If MARR is 10%, which project do you select using IRR method?

(a) Explain cash flow and opportunity cost approach of replacement analysis with suitable example. [4] (b) Company has been offered a chance to purchase another printing machine for 15,000. Over its 3 year useful life, machine will reduce labor and raw materials usage sufficiently to cut operating cost from 8,000 to 6,000. It is estimated that old machine can be sold for 2,500 and new machine can sold for 5,500 at the end of year

Old can be sold at 10,000 at the beginning of the year. Suppose that firm will need either machine (old or new) for only 3 years. Assume firm's interest rate is 12%. Decide whether replacement is justified now?

(a) Explain with suitable example, how scenario analysis and risk-adjusted MARR can be used for quantitative risk analysis. [4] (b) If a Chinese water pump cost Rs. 7,500 only having life of 4 years warranty and 89% efficiency with 1 horse power capacity. Whereas the similar capacity Indian water pump costs Rs. 13,000 with 6 years warranted life and it has efficiency of 93%. By taking Rs. 12 per unit cost of electricity, find the breakeven point and draw your decision to operate pump 4 hrs. every day throughout the year. $MARR=15\%$.

(a) What is MACRS? List out the assumptions made for calculating MACRS percentage. [4] (b) A business purchases a delivery vehicle with the following parameters: Original Cost: $100,000 Salvage Value: $10,000 Useful Life: 5 years Interest Rate: 10% (compounded annually) Find annual depreciation amount and book value using sinking fund and SOYD method.

Define inflation rate, market rate and inflation free interest rate. Suppose that the price of the laptop increases by 5% in the first year, 7% in the second year and 9% in the third year. What will be the average inflation rate assuming the base price of Rs 1,20,000?