Engineering Economics and Management

Year: IV Semester: VIII

A. Course Objective:

1. To provide the students' knowledge of the basic tools and methodology of economic studies for evaluation engineering project in private industry, in the public sector and in the utilities area
2. To provide knowledge about FIG guidelines on Engineering Economics and Management

B. Course Contents

1. Introduction (4hrs)

1.1 Business and accounting terminology
1.2 Cash flow
1.3 Economic systems
1.4 FIG guidelines

2. Cost Classification and Analysis (4hrs)

2.1 The elements of cost
2.2 Classification of cost: overhead cost, prime cost
2.3 Cost variance analysis
2.4 Job and process costing

3. Interest and the Time Value of Money (5hrs)

3.1 Simple interest, compound interest, interest tables, interest charts
3.2 Present worth
3.3 Nominal and effective interest rates
3.4 Continuous compounding and continuous compounding formula
3.5 Interest calculation for uniforms gradient

4. Basic Methodologies of Engineering Economic Studies (5hrs)

4.1 Present worth and annual worth methods
4.2 Future worth method
4.3 Interest rate of return method
4.4 Drawbacks of the internal rate of return method
4.5 External rate of return method
4.6 Minimum attractive rate of return
4.7 The payback (pay-out) period method

5. Cost/ Benefit Analysis (5hrs)

5.1 Conventional Cost/benefit ratio
5.2 Modified cost/benefit ratio
5.3 Break-even analysis

6. Investment Decisions (7hrs)

6.1 Comparison of alternative having same useful life
6.2 Comparison of alternative having different useful life
6.3 Comparison of alternative including and excluding the time value of money
6.4 Comparison of alternative using the capitalized worth method
6.5 Definition of mutually exclusive investment alternatives in term of Combination of project
6.6 Comparison of mutually exclusive alternative

7. Risk Analysis (4hrs)

7.1 Project operating under conduction of certainly
7.2 Projects operating under conditions of uncertainly
7.3 Decision tree
7.4 sensitivity analysis

8. Taxation system in Nepal (4hrs)

8.1 Taxation law in Nepal
8.2 Depreciation rates for buildings, Equipment, furniture, etc
8.3 Recaptured depreciation
8.4 Taxes on normal gains
8.5 Taxes on capital gain
8.6 Value added Tax (VAT)

9. Demand Analysis and Sale Forecasting (7hrs)

9.1 Demand analysis
9.2 Correlation of price and consumption rate
9.3 Multiple correlation of price and consumption rate
9.4 Market research
9.5 Sales forecasting
9.6 Criteria for desirable sales forecasting procedures
9.7 Factors affecting accuracy of forecasting

References:

• E.P. DeGramo, W.G. Sullivan and J.A. Bontadelli, 8th Edition, Macmillan Publishing company, 1988
• N.N. Borish and S.Kaplan, "Economic Analysis: For Engineering and Managerial Decision Making", McGraw-Hill

Examination scheme

Model Questions

Very Short questions: 4*2=8

1. Define the term engineering economics
2. What is effective and nominal interest rate?
3. Define the term VAT
4. Write one advantage of payback period method

Short questions: 8 * 4 = 32

1. Why engineering economics is considered as important aspect for making decision for engineers? Explain
2. A bank is starting its nominal interest rate of 9% p.a and compounding quarterly. Calculate the effective interest rate (i) a year (ii) a quarter (iii) a month (iv) half year
3. How much money should you deposit now in the bank account that gives 8% interest per year if you wish to draw Rs. 10,000 per month for 10 years?
4. Explain replacement. Also explain the main reasons for replacement
5. Differentiate between economic and financial analysis with suitable examples
6. Calculate the equivalent present worth of the project from the following cash flow. Assume inflation free interest rate and inflation as 10% respectively

7. Choose the best project among these alternatives using IRR, if MARR=15% and study period is 10 years. Salvage value is 20%

8. A company bought a machine for Rs. 25,000 which is expected to produce a benefit of Rs. 8,000 per year for 5 years. Its salvage value at the end of 5 years is Rs. 10,000. Calculate after tax cash flow if Tax Rate is 40% and depreciation is on sinking fund method. I=20%

Long questions: 2 * 10 = 20

1. Find economic service life from the following information

   • Initial cost: Rs 50,000
   • Operation cost: Rs 10,000 for the first year and increases by 15% thereafter
   • Salvage value: Decline each successive year by 20% over previous year
   • Useful life: 8 years
   • MARR: 15%

2. Perform sensitivity analysis for the following project over range of ±30% in parameters; (i) Initial investment (ii) Annual revenue (iii) life year. Use PW formulation