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EEC - MEC - EECA 2013 QP


Question Bank
Sub. Code/Name: MG 2451 Engineering Economics and Cost Analysis
Year/Sem: 4TH /VIII
Part - A
1. What is Engineering Economics?
Engineering economics is a science, which deals with the application of economic
theory in Engineering Practices. It is the study of allocation of resources available
to a firm among its activities.
2. State the Law of supply.
The law of supply sates that quantity supplied is positively related to price.
3. What do you mean by elasticity of supply?
Elasticity of supply is the degree of responsiveness of change in supply to change
in price of sellers.
4. State the Law of Demand.
According to Marshell, The amount demanded increases with a fall in price and
diminishes with a rise in price.
5. What is called Economic Efficiency?
It is the ratio of product per service worth to the input resource cost.
Product/ Service worth
Economic Efficiency=
Input Resource Cost
6. What are the elements of Cost?
The elements of cost are fixed costs and Variable cost.
7. What is called marginal cost?
Marginal Cost is the change in total cost as a consequence of adding one more
Increase in Total Cost
Marginal Cost=
Increase in Output
8. What is called Opportunity Cost?
Opportunity costs are the costs of displaced alternatives.

EEC - MEC - EECA 2013 QP

9. What do you mean by sunk cost?

Sunk cost is one which is not affected by a change in the level or nature of
business activity. Ex. Depreciation.
10. What do you mean by margin of safety?
Margin of safety is the distance between the break even point and the output being
11. What is called breakeven point?
It is the intersection of the total cost line and the income line.
12. What is profit volume ratio?
Profit volume ratio measures the profitability in relation to sales.
Part - B

State and explain types of demand.

Explain the concept of Break Even Analysis.
Explain the steps involved in Process Planning.
A firm has a fixed cost of Rs. 9500, Selling Price per unit is Rs.5 and Variable
cost per unit is Rs. 3. Determine break even point in terms of volume and also
sales value. Calculate the margin of safety considering that the actual production
is 7500 units.
5. The following figures relate to a small manufacturing company:
Sales (Rs) : 700000
Variable (Rs): 450000
Fixed Cost(Rs): 50000
Calculate: 1) BEP

2) P/V Ratio.

EEC - MEC - EECA 2013 QP

1. What do you mean by Value Analysis?
Value Analysis is the systematic identification and elimination of unnecessary,
unessential costs.
2. List out the types of Value.
Esteem value, use value, Cost value and Exchange value.
3. What is called Esteem Value?
The features or qualities which makes the ownership of the product desirable
or which increases the sales appeal.
4. State any two benefits of Value Analysis.
It develops logical and analytical approach to solve problems.
It promotes creativity, quality awareness, positive attitude amongst the
5. What is called effective interest rate?
The equivalent interest rate for any period other than a year is called effective
interest rate.
Effective interest rate = (1+i/C)c-1
6. What is single payment present worth factor?
Single future sum that will be received after n periods at an interest rate of i
compounded at the end of every interest period.
where, F- Future worth, P-Present worth, i- interest rate.
7. What is called equal payment series sinking fund?
The equivalent amount that should be deposited at the end of every interest
periods to realize the future sum at the end of nth period at the interest rate of i.
8. Define Uniform series Annual equivalent amount.
The annual equivalent amount of a series with an amount A1 at the end of the first
year and with an equal increment (G) at the end of each following n-1 years with
an interest rate of I compounded annually.

EEC - MEC - EECA 2013 QP

1. A person wishes to have a future sum of Rs. 3,00,000 for his sons education after
15 years from now. What is the single payment that he should deposit now so that
he gets the desired amount after 15 years? The bank gives 15% interest rate
compounded annually.
2. Pradeepa is planning for his retied life. She plans to invest an equal sum of Rs.
30,000 at the end of every year for the next 30 years starting from the end of next
year. Bank gives 20% interest rate. Find the maturity amount of her account after
30 years.
3. A company has to replace a present facility after 20 years at an outlay of Rs.
8,00,000. It plans to deposit an equal amount at the end of every year for the next
15 years at an interest rate of 20%. Find the equivalent amount that must be
deposited at the end of every year for the next year.
4. A bank gives a loan to a company to purchase equipment Rs. 20,00,000 at an
interest rate of 18% annually. This amount should be repaid in 15 yearly equal
installments. Find the installment amount that the company has to pay to the bank.
5. A person is planning for his retired life. He would like to deposit Rs. 9000 at the
end of first year and there after he wishes to deposit the amount with an annual
decrease of Rs. 500 for the next 12 years with an interest rate of 15%. Find the
total amount at the end of 20th year of above series.

EEC - MEC - EECA 2013 QP

1. What do you mean by present worth method?
Cash flow of each alternative will be reduced to time zero by assuming an interest
rate i. Then the best alternative will be selected by comparing the present worth
amounts of the alternatives, depending on the type of decisions.
2. What s called future worth method?
The future worth of various alternatives will be computed and then the alternative
with the maximum future worth of net revenue or the minimum future worth of
net cost will be selected.
3. What is called rate of return method?
The rate of return of a cash flow pattern is the interest rate at which the present
worth of that cash flow pattern decreases to zero. The alternative with highest rate
of return is chosen as the best alternative.
4. Define annual equivalent method?
The annual equivalent cost or revenue of each alternative is found, and then the
alternative with maximum annual equivalent revenue or minimum annual
equivalent cost will be chosen as the best alternative.
5. State revenue dominated cash flow?
The profit, revenue, salvage value (all in flow to an organization) will be assigned
positive sign. The costs (outflows) will be assigned with negative sign.
6. State Cost dominated cash flow?
The costs (outflows) will be assigned with positive sign. The profit, revenue,
salvage value (all in flow to an organization) will be assigned negative sign.
1. An construction company has two bids for an elevator to be installed in a new
building. The details of the bids for the elevators are as follows:
Engineers Estimates
Initial Cost
Annual Operations
Life (Years)
Maintenance Cost
Guru Elevator Inc.
Prakash Elevator Inc.




Determine which bid should be accepted, based on present worth method of

comparison assuming 25% interest rate, compounded annually.

EEC - MEC - EECA 2013 QP

2. A finance company advertises two investment plans. In plan A, the company pays
Rs. 20,000 after 10 years for every Rs. 1000 invested now in plan B, for every
Rs. 1000 invested, the company pays Rs. 5,000 at end of 5 th year and Rs. 5,000 at
end of 10th year-select the best investment plan form the investors point of view
at i = 13% compounded annually.
3. Consider the following two mutually exclusive alternatives
End of Year
A (Rs)
- 40,00,00025,00,000
B (Rs)


At ip 18% select base alternative based on future worth method of comparison.

4. A company is planning to purchase on advance machine under. Three original
manufacturers have responded to its tendes whose particulars are tabulated as:
Yearly Equal
Number of
Payment (Rs.)
Installment (Rs.)
Determine the best alternative base don annual equivalent method by assuming i =
5. A company must decide whether to buy machine X or Y.
Machine X
Initial cost (Rs.)
Useful life (Year)
Salvage value at end of m/c life
Annual maintenance (Rs.)
At 15% interest rate, which machines should be purchased?

Machine Y

EEC - MEC - EECA 2013 QP

1. List out the types of maintenance.
Maintenance may be classified as
Corrective or breakdown maintenance
Scheduled maintenance
Preventive maintenance and
Predictive maintenance
2. State the disadvantages of breakdown maintenance.
1. Increased chances of accidents
2. Reduction of output
3. Deterioration of plant
4. Direct loss of profit
3. List out the objectives of Preventive Maintenance.
1. To minimize the possibility of unanticipated breakdown of machinery.
2. To maintain the optimum productive efficiency.
3. To reduce the work content of maintenance jobs.
4. To achieve maximum production at minimum repair cost.
4. What do you mean by overhaul?
A comprehensive examination and restoration of a facility to an acceptable
5. What is called availability?
Period for which a facility is in usable state.
6. State the reasons for replacement.
(a) Deterioration
(b) Obsolescence
(c) Inadequacy
(d) Working conditions
7. What is called economic life?
The point where the total cost (capital recovery cost and maintenance cost) is
minimum is called economic life of a machine.
8. What is called challenger and defender?
If an existing equipment is considered for replacement with the new equipment ,
then the existing equipment is known as the defender and the new equipment is
known as challenger.

EEC - MEC - EECA 2013 QP

1. Two years ago, a CNC lathe was purchased at a cost of Rs. 2,50,000 to be useful
for eight years. Its salvage value at the end of its life is Rs. 25,000. The annual
maintenance cost is Rs. 25,000. The market value of the present machine is Rs.
1,50,000. Now, a new CNC lathe to cater to the needed of the present lathe is
available at Rs. 2,00,000 to be useful for six years. Its annual maintenance cost is
Rs. 14,000. The salvage value of the present lathe with the new lathe.
2. A petrol engine was installed 10 years ago at a cost of Rs. 75,000. It has a present
realizable market value of Rs. 25,000. If kept, it can be expected to last five years
more, with operating and maintenance cost of Rs. 15,000 per year and to have a
salvage value of Rs. 10,000 at the end of the fifth year. This engine can be
replaces with an improved version costing Rs. 90,000 which ahs an expected life
of 20 year. This improved version will have an estimated annual operating and
maintenance cost of Rs. 10,000 and ultimate salvage value of Rs. 15,000. Using
an interest tare of 15%, make an annual equivalent cost analysis to determine
whether to keep or replace the old engine.
3. The following table gives the operation cost, maintenance cost and salvage valve
at end of every year of M/C whose purchase value is Rs. 20,000
End of year
Operative Cost at Maintance Cost Salvage Value at End of
End of Year
at End of Year
Interest rate = 15%
4. The following data are available for existing equipment and for proposed
equipment to replace the existing one. Find whether the concerns would go for
replacement or not.
Existing Equipment
Proposed One
a. Cost
Rs. 1500
Rs. 15000
b. Operating Expenses Rs. 5000
Rs. 48859
c. Scrap Value
Rs. 400
Rs. 80
d. Interest
e. Life Time
2 Years
5 Years
5. Given below is the data for two equipments. Find which alternative you will
Equipment I
Equipment 2
Initial Cost (P)
Rs. 10,000
Rs. 15,000
Annual Operating Cost
Rs. 5,000
Rs. 1,000
Life of Equipment
10 Years0
10 Years

EEC - MEC - EECA 2013 QP

Salvage Value (L)

Interest Rate (i) 5%

Rs. 2,000

Rs. 4,000

EEC - MEC - EECA 2013 QP

1. Define depreciation.
Depreciation may be defined as the method of spreading the cost of a fixed asset
over the life or expected years of use of an asset.
2. List out the depreciation due to physical conditions.
(i) Wear and tear due to operating use
(ii) Action of elements like rust heat and decay.
Disasters like accidents, earthquakes,
(iv) Poor maintenance
3. List out the method of calculating depreciation.
Straight-line method
Diminishing balance method
The sum of years digit method
Sinking fund method
Depreciation by services.
4. Define inflation.
Inflation may be defined as a sustained rise in the general price level.
1. The state government of Goa is planning to construct a bridge across the river.
The estimated initial investment for constructing the bridge is Rs. 35,00,000. The
estimated life of the bridge is 15 years. The annual operation and maintenance
cost is Rs. 1,50,000. The value of fuel savings due to the construction of the
bridge is Rs. 5, 00,000 in the first year and it increases by 50,000 every year
thereafter till the end of the life of the bridge. Check whether the project is
justified based on BC ration by assuming an interest rate of 12% compounded
2. An engine lathe was purchased for Rs. 20,000 its useful life was 5 years and
salvage value of Rs. 10,000. Using the diminishing balance method, calculate the
depreciation ratio.
3. An engine lathe was purchased for Rs. 15,000 its useful life was10 years and
salvage of Rs. 5,000. Using diminishing balance method, estimate depreciation
fund at end of two years.
4. Estimate rate of depreciation from following data using sinking fund method.
Cost of machine Rs. 15,000

EEC - MEC - EECA 2013 QP

Swap Value Rs. 5,000

Interest at rate of 9% compound
Useful life of machine 10 Years.
5. Estimate the rate of depreciative using sinking fund method.
Cost of Machine Rs. 15,000
Scrap Value Rs. 11,000
Interest at rate of 8% compound
Life of Machine 5 Years.