Problems Relating To Engineering Economy and Finance Group - Basic Theory of Engineering Economy and Finance
Problems Relating To Engineering Economy and Finance Group - Basic Theory of Engineering Economy and Finance
Problems Relating To Engineering Economy and Finance Group - Basic Theory of Engineering Economy and Finance
M
n
Where:
=contribution of labour
=contribution of machine
=contribution management
Where:
Decision:
Do not buy the land.
Purchase of the land should not be recommended.
If present value of cash inflows is less than the present value of the cash outflows, the net present
value is said to be positive and the investment proposal is considered to be rejected.
15. At least solve three problems relating to NPV
Problem 1
The present worth by investing 1000 today receiving 250 every year in 5 years at an interest or
discount rate of 10%, can be calculated
NPW = - 1000
/ (1 + 0.1)
0
+ 250
/ (1 + 0.1)
1
+ 250 /(1 + 0.1)
2
+ 250 /(1 + 0.1)
3
+ 250 /(1 + 0.1)
4
+ 250 /(1 + 0.1)
5
= -52.3
PV is negative - and the investment should be avoided.
Problem 2
Invest $2,000 now, receive 3 yearly payments of $100 each, plus $2,500 in the 3rd year. Use
10% Interest Rate.
$100 & $2500
$100
$100
0 1 2 3
- $2,000
Solution :
Where :
Decision:
It is good investment.
The company is gaining profit and the company will sustain.
If present value of cash inflows is greater than the present value of the cash outflows, the net
present value is said to be positive and the investment proposal is considered to be
acceptable.
Problem 3
We are evaluating a series of $1000 investment in year 1. With discount rate 10%. You expect
to receive $110 in year 2. You expect to receive $1,200 in year 3. The NPV of the investment
would be:-
$110 $1200
0 1 2
-$1000
Answer
Where :
Decision:
When NPV is greater than zero it means that the discounted value of future cash flows is
greater than your initial investment and you would be getting an even higher return than you
desire.
If present value of cash inflows is greater than the present value of the cash outflows, the net
present value is said to be positive and the investment proposal is considered to be acceptable.
16. What is the use of depreciation model in engineering management
Depreciation is the reduction in value of an asset. In engineering management, the method
used to depreciate an asset is a way to account for the decreasing value of the asset to the owner
and to represent the diminishing value of the capital funds invested in it.
17. At least solve three problems relating to depreciation
Problem 1
An asset has a useful life of 3 years.
Cost of the asset is $2,000.
Residual Value is $500.
Annual Depreciation cost will be
Problem 2
Suppose that you purchase a car for $1000. The scrap value of the car after its useful life is $200,
and the useful life of the car is 4 years. In order to calculate the depreciation of the car for the
year 1, you will need to perform the following computation:
Depreciation =
Since this is straight-line depreciation, you need to subtract this value from the balance sheet for
the next 4 years in order to calculate the net book value of the asset.
Problem 3
You buy a new computer for your business costing approximately $5,000. You expect a salvage
value of $200 selling parts when you dispose of it. Accounting rules allow a maximum useful
life of five years for computers. In the past, your business has upgraded its hardware every three
years, so you think this is a more realistic estimate of useful life, since you are apt to dispose of
the computer at that time. Using that information, you would plug it into the formula:
($5,000 purchase price - $200 approximate salvage value) 3 years estimated useful life
The answer, $1,600, is the depreciation charges your business would take annually if you were
using the straight line method.
Group-Production Performance
18. State your concept of production performance
"Production performance" refers to performance relative to measures and indicators of
product and service characteristics important to customers. Examples include product reliability,
on-time delivery, customer-experienced defect levels, and service response time. For non-profit
organizations, "product performance" examples might include program and project performance
in the areas of rapid response to emergencies, at-home services, or multilingual services.
A production performance report is made up of a set of 1 or more production responses. The
production performance also contains the information that defines the context of the report, such
as start time, end time, location, and published date.
19. With mathematical Model define (relating to mechanical and manufacturing Engineering)
Physical efficiency, Technical efficiency and Economic efficiency.
Physical efficiency
Physical efficiency is related to the physical amount of all factors used in the process of
producing some product. However it is not the same as the economic efficiency which related to
the value of the product.
Physical efficiency takes the form:
System output(s)
Physical (efficiency) = ---------------------------------
System input(s)
Technologically efficient
There are two ways for a production process to be technologically efficient. One, a production
process is technologically efficient if it yields the highest output possible for a given level of
input. For example, if you build night stands and you get the greatest number of night stands as is
possible from 200 board feet of mahogany then you are efficient in the production of night
stands. Two, a production process is technologically efficient if it uses the minimum level of
input to produce a given level of output. For example, if you build 10 night stands with the
minimum amount of wood possible then you are technologically efficient in the production of
night stands.
Technological efficiency is measured by the ratio of units of output to units of input:
Units of output
Units of input
Referring to this formula and the above discussion, technological efficiency increases whenever
the units of output increase or the units of input decrease. A production process is
technologically efficient whenever this measurement is as large as possible.
Economic efficiency
Economic efficiency is related to the value of all inputs used in producing a given
amount. The production of a given output is economically efficient if there is no other ways of
producing the output that use smaller total value of inputs. The economic efficiency can be
calculated as followed:
System worth(s)
Economic efficiency = ------------------------------ x 100%
System cost(s)
The economic efficiency also called benefit-cost ratio. If the efficiency obtain is higher
than 100%, the product make a lots of profits. In contrast to physical efficiency, economic
efficiency can exceed unity, and in fact should, if a project is to be deemed economically
feasible. The most difficult part of determining economic efficiency is accounting for all the
factors which might be considered benefits or costs of a particular project, and converting these
benefits or costs into a monetary equivalent.
20. At least solve three problems relating to Physical efficiency, Technical efficiency and
Economic efficiency.
Physical efficiency
Problem 1
In the power plant system that converting fuel into electrical energy. Assume that the fuel input
is 100 litres, after the conversion process, the output electrical energy produce is 36 kilo-Watt.
Therefore, the overall conversion physical efficiency is:
36
Physical efficiency = ------------------- x 100%
100
= 36%
The overall conversion physical efficiency is 36%. The remaining 74% of the fuel is being
converted into other source of energy such as heat energy that is being removed during the
process.
Problem 2
Consider in the production of the car in a manufacturing company. Assume the amount of the
physical material use is 100. Then the output material of the car is 32. Hence the physical
efficiency is:
32
Physical efficiency = ------------------- x 100%
100
= 32%
The remaining 68% is all the waste material produce during the production of the car.
Problem 3
Consider the production of the chair that made by wood. Assume that the amount of wood use is
100. After all the cutting and binding process, the total waste of the wood is 76. Hence the
physical efficiency of the process is as followed:
(100-76)
Physical efficiency = ----------------------- x 100%
100
= 24%
Therefore, the physical efficiency of the product is 24%. The remaining waste can be recycling
to make other product so that the amount of wasted material can be reduced.
Economic efficiency
Problem 1
Consider in the power plant that converting the fuel into electrical energy. Consider the cost of
the fuel input is $5.00 per million fuels. After the conversion process occurred, the electrical
power is sells for $0.03 per kWh which mean $8.79 per million. Hence the economic efficiency
is as followed:
$8.79 per million
Economic efficiency = ------------------------------ x 100%
$5.00 per million
= 176%
This mean that the company obtain extra 76% profits in term of economically.
Problem 2
Consider a manufacturing company that manufacture the motorcycle. Assume the amount of cost
used to manufacture a fully furnished motorcycle is RM1800 per unit. The company can produce
5 motorcycles per day. The company sell the motorcycle to the customer RM3500 per unit.
Calculate the economic efficiency of the product in one day.
In one day, total cost input used is RM1800 x 5 = RM9000
The total cost selling is RM3500 x 5 = RM17500
Therefore the economic efficiency is:
RM 17500
Economic efficiency = ------------------------------ x 100%
RM 9000
= 194%
The company obtain extra 94% profit which is economically feasible for the company.
Problem 3
Consider a firm that is currently using 100 units of labour and 50 units of capital to produce a
certain level of output. If the firm could maintain its current output level by using only 90 units
of labour without using more capital, then the economic efficiency is:
90
Economic efficiency = ------------------- x 100%
100
= 90%
In a firm, the 90% also is being technically inefficient in its current methods because it is
wasting 10 units of labour. Thus a good physical efficiency is about getting the most output
from any given set of inputs; or, equivalently, about producing a given level of output using the
least amount of physical inputs. There are many method can be used in the firm so that to
obtained a good economic efficiency.
21. What will happen if:
Physical efficiency and Technical efficiency <1,
=
If physical efficiency and technical efficiency is <1, than the system, manufacturing or
production is not sustain sustainability. Hence, the process needs to stop immediately before
company lost money. When physical efficiency and technical efficiency is =1, the system,
manufacturing or production is constant sustainability. So, the company can continue with the
manufacturing.
22. What will happen if:
Economic efficiency <1
=
>
When the economic efficiency is <1, the production is not sustain, hence the company should
stop the manufacturing process stop immediately before it lost money.
When the economic efficiency is =1, the production is constant sustain, hence the company can
proceed the manufacturing process.
When the economic efficiency is >1, the production is significantly sustain, hence, the company
should proceed the manufacturing process to gain profit.
23. Define elasticity of output with respect to various inputs.
In economics, output elasticity is the percentage change of output (GDP or production of
a single firm) divided by the percentage change of an input. It is sometimes called partial output
elasticity to clarify that it refers to the change of only one input.
As with every elasticity, this measure is defined locally, i.e. defined at a point. If the
production function contains only one input, then the output elasticity is also an indicator of the
degree of returns to scale. If the coefficient of output elasticity is greater than 1, then production
is experiencing increasing returns to scale. If the coefficient is less than 1, then production is
experiencing decreasing returns to scale. If the coefficient is 1, then production is experiencing
constant returns to scale. Note that returns to scale may change as the level of production
changes.
Output elasticity is defined as the percentage change in output per one percent change in
all the inputs. The coefficient of output elasticity can be used to estimate returns to scale.
The mathematical formula is where x represents the inputs and Q, the output.
24. At least solve three problems relating to elasticity.
Problem 1
This is a measure of the responsiveness of demand to changes in price. Price elasticity of
demand may be calculated using the point method as follows:
For example, assume the price of particular new car model rose from $20,000 to $25,000,
resulting in demand falling from 10,000 to 5,000 new car sales.
The calculation would be as follows;
Problem 2
Assume that when gas prices increase by 50%, gas purchases fall by 25%. Using the formula
above, we can calculate that the price elasticity of gasoline is:
Price Elasticity = (-25%) / (50%) = -0.50
Thus, we can say that for every percentage point that gas prices increase, the quantity of gas
purchased decreases by half a percentage point.
Problem 3
When the price of CD increased from $20 to $22, the quantity of CDs demanded decreased from
100 to 87. What is the price elasticity of demand for CDs? Is it demand elastic or inelastic?
Price Elasticity of demand = % change in Q.D. / % change in Price
Calculating a %
The price increases from $20 to $22. Therefore % change = 2 / 20 = 0.1
0.1 = 10% (0.1 *100)
Quantity fell by 13 / 100 = 0.13 (13%)
Therefore elasticity = 13 / 10
Therefore elasticity = -1.3
Therefore Demand is elastic. Elastic demand occurs when % change in Quantity is
greater than % change in price; when elasticity >1
25. Define return to scale of production
Return to scale is refers to how much additional output can be obtained when we change all
inputs proportionately in production.
26. What will happen if: return to scale <1
=
>
When return to scale =1, then the production function has constant returns to scale. More
precisely, a production function has constant returns to scale if, for any > 1,
When return to scale <1, then the production function has decreasing returns to scale. More
precisely, a production function has decreasing returns to scale if, for any > 1,
When return to scale >1, then the production function has increasing returns to scale. More
precisely, a production function has increasing returns to scale if, for any > 1,
27. Develop production inputs-output model
28. At least solve three problems relating to inputs-output
Problem 1
A 500 MW (net) generator is 35% efficient. It is being supplied with coal costing $1.70 per
MBtu and with heat content 9000 Btu per pound. What is the coal usage in lbs/hr? What is the
cost?
Problem 2
Labour (5000) Q (out amount)
K (50000) Machine(20000)
Manufacturing car
Hence, the output is 181 car.
Problem 3
output
i.)
Q
o
= 30L
o
0.6
= 30 (3000)
0.6
= 3659.2662 units
Q
1
= 30L
1
0.6
= 30(3400)
0.6
= 3944.6512 units
Q = Q
1
- Q
o
= 3944.6512 3659.2662
M K
L
1
= 3400
Manufacturing process
= 285.385 units
The total change in output due to changing in the labour forces in production is 285.385
units.
ii.)
% Q =
x 100%
= 7.8 %
% L =
x 100%
= 13.33 %
=
=
= 0.586
Thus, the elasticity of the output with respect to labour is 0.586.
iii.)
Comment:
1. Initially, output per labour was more than 1. However, after adding 400 labours, output
per labour becomes 0.5 units per labour.
2. It indicates 400 newly added labour is not fully utilized.
3. Labour is not fully utilized because there is excess labour.
4. Thus, we need to remove excess labour.
Group - Project Risk Analysis
29. State about the fundamental indicators of risk management.
Fundamental analysis of a business involves analyzing its financial statements and health,
its management and competitive advantages, and its competitors and markets. When applied
to futures and forex, it focuses on the overall state of the economy, and considers factors
including interest rates, production, earnings, employment, GDP, housing, manufacturing and
management. When analyzing a stock, futures contract, or currency using fundamental analysis
there are two basic approaches one can use; bottom up analysis and top down analysis. The term
is used to distinguish such analysis from other types of investment analysis, such as quantitative
analysis and technical analysis.
Fundamental analysis is performed on historical and present data, but with the goal of making
financial forecasts. There are several possible objectives:
to conduct a company stock valuation and predict its probable price evolution,
to make a projection on its business performance,
to evaluate its management and make internal business decisions,
to calculate its credit risk.
30. Demonstrate, how NPV, break even, expected value method and decision three methods
could be used to reduce project risk.
The cost concept of the project risk analysis can be demonstrated by decision tree where it
solving the problem with the best decision and finding expected value of all possible states of
nature.
How Can Risk Analysis Aid Project Management?
1. Provide better information to support decisions regarding project direction and the setting of
schedule and cost targets and contingencies.
2. Identify actions that can be taken to help improve technical, schedule and cost performance.
3. Address known causes of poor project performance.
4. Assist in monitoring the status of the program as it proceeds.