ES 91 Pastexams

7/23/2019 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#?-
http://www.wisegeek.com/what-is-a-widget.htmhttp://www.wisegeek.com/what-is-a-widget.htm


15/24

*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

-.-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)


16/24

Annual revenue ,10;#---

Annual cost+


@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#---


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
http://www.investinganswers.com/financial-dictionary/economics/variable-costs-804http://www.investinganswers.com/financial-dictionary/economics/variable-costs-804


17/24

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


-.-0$Annual laor cost) Q -.-;$&irst cost) ,3-#---

E9Aa &irst cost $A%,#12/#1-) Q Annual cost $--#---)$-.133;) Q 3-#--- ,13#?B-
http://www.investinganswers.com/financial-dictionary/economics/fixed-costs-2948http://www.investinganswers.com/financial-dictionary/stock-market/volume-2319http://www.investinganswers.com/financial-dictionary/economics/fixed-costs-2948http://www.investinganswers.com/financial-dictionary/stock-market/volume-2319


18/24

*ype 6


,ayroll ta'esQ !nsurance and property ta'es



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




-.-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





,> &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-#---


@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+


19/24


@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#---


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


20/24

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


21/24

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 .


22/24

*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


5oney worth 12/

Solution+

6y D8D on additional investment

8ld 5otorepreciation $&irst cost)%$&%A#12/# B) ,B#?20


*otal + ,-#?20

Gew 5otor

epreciation $&irst cost)%$&%A#12/#11) B#3?


*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.


23/24

;. 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


24/24

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

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