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DEPARTMENT OF MECHANICAL ENGINEERING

QUESTION BANK

VIII SEMESTER

MG6863- ENGINEERING ECONOMICS

Regulation – 2013

Academic Year 2016 – 17

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DEPARTMENT OF MECHANICAL ENGINEERING

QUESTION BANK
SUBJECT : MG6863- ENGINEERING ECONOMICS
SEM / YEAR: VIII / IV

UNIT I - INTRODUCTION TO ECONOMICS

Introduction to Economics- Flow in an economy, Law of supply and demand, Concept of Engineering
Economics – Engineering efficiency, Economic efficiency, Scope of engineering economics - Element of
costs, Marginal cost, Marginal Revenue, Sunk cost, Opportunity cost, Break-even analysis - V ratio,
Elementary economic Analysis – Material selection for product Design selection for a product, Process
planning.
PART – A
Q.No Questions BT Level Competence
1. Define Economics? (BT-1) Remembering
2. Compare law of supply and demand. (BT-2) Understanding
3. Identify the four goals of economy? (BT-3) Applying
4. Classify factors influencing supply. (BT-4) Analyzing
5. Discuss the concept of factors in fluency demand. (BT-5) Evaluating
6. Interpret your understanding on Economic efficiency. (BT-6) Creating
7. Define engineering economics. (BT-1) Remembering
8. Compare marginal cost and marginal revenue in economics. (BT-2) Understanding
9. How would you estimate marginal revenue? (BT-3) Applying
10. What is the outcome of process planning? (BT-4) Analyzing
11. How is profit making related to break even analysis? (BT-5) Evaluating
12. Interpret P/V ratio to cost benefit analysis. (BT-6) Creating
13. Define Sunk Cost. (BT-1) Remembering
14. Compare law of Demand and Demand shift. (BT-2) Understanding
15. How would show your understanding on Break-Even Analysis? (BT-3) Applying
16. Classify the steps in the process planning. (BT-4) Analyzing
17. Define the term demand and law of demand in economics. (BT-1) Remembering
18. Classify the various elasticity of demand. (BT-2) Understanding
19. Define marginal cost. (BT-1) Remembering
20. What is the P/V ratio when Marginal cost is Rs.2400, Selling price is (BT-1) Remembering
Rs.3000.
PART – B
1. i) How would you describe the flow in an economy with
diagram? (10Marks) BT 1
Remembering
ii) How would you describe an economy? (6 Marks)
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2. i) How would you summarize the concept law of supply and
demand with suitable example? (10Marks) BT 2 Understanding
ii) Interpret picture of law of supply and demand. (6 Marks)

3. i) How would you show your understanding on break even

analysis and it role in cost efficiency. (10Marks) BT 3
Applying
ii) What would result if “no loss or no profit in BEP? (6
Marks)
4. Classify the elements of cost and its types. BT 4 Analyzing
5. i) Categorize the types of process planning. BT 5
Evaluating
ii) Discuss Process Planning /Process Modification.
6. Evaluate the scope of engineering economics and its Industrial BT 6 Creating
application.
7. i) Define economics. ( 2 marks)
ii) What is the process flow of goods, services, resources, BT 1 Remembering
money payments in a simple economy? ( 14 marks)
8. Compare the process of material selection with process planning. BT 2 Understanding
9. A) A concern manufacturing a domestic appliance proposes to put up
an improved model in market and the selling price for the same to be
decided .The selling price will cover the overheads and ensure the
proportion of profit on sales as before. The material in the new model
will cost Rs4000 and the direct wages would be Rs2000.Following
figures relate to the previous year:
Stock material on 1st April 2006 Rs 2,00,000
Stock material on 31stMarch 2007 Rs 2,20,000
Purchase of raw material in this period Rs 5,20,000
Manufacturing wages Rs 1,60,000 BT 3 Applying
Works overhead Rs 80,000
Administrative and sales overhead Rs 80,000
Sales during the year Rs 9,02,000
Overhead absorption base on % of direct labour.
Construct a Cost Sheet & conclude with the selling price.
B) Analyze the effect of price on demand and supply and suitable
diagram.

10. List the factors of demand and supply. What are the consequences of BT 4
Analyzing
these determinants?
11. i) Alpha Associates has the following details: (10 Marks)
Fixed cost = Rs. 20,00,000
Variable cost per unit = Rs. 100
Selling price per unit = Rs. 200
Find
BT 1
(a) The break-even sales quantity, Remembering
(b) The break-even sales
(c) If the actual production quantity is 60,000,
find (i) contribution; and (ii) Margin of safety by all methods.

ii) Draw BEP point using above values. (6 Marks)

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12. Consider the following data of a company for the year 1997:
Sales = Rs. 1,20,000
Fixed cost = Rs. 25,000
Variable cost = Rs. 45,000
Find the following: BT 2 Understanding
(a) Contribution
(b) Profit
(c) BEP
(d) M.S.
13. Consider the following data of a company for the year 1998: Analyzing
Sales = Rs. 80,000
Fixed cost = Rs. 15,000
Variable cost = 35,000
Find the following: BT 4
(a) Contribution
(b) Profit
(c) BEP
(d) M.S.
14. Krishna Company Ltd. has the following details:
Fixed cost = Rs. 40,00,000
Variable cost per unit = Rs. 300
Selling price per unit = Rs. 500 Remembering
Find BT 1
(a) The break-even sales quantity
(b) The break-even sales
(c) If the actual production quantity is 1,20,000, find the following:
(i) Contribution
(ii) Margin of safety by all methods
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VALLIAMMAI ENGINEERING COLLEGE
SRM Nagar, Kattankulathur – 603 203.

DEPARTMENT OF MECHANICAL ENGINEERING

QUESTION BANK
SUBJECT : MG6863- ENGINEERING ECONOMICS
SEM / YEAR: VIII / IV

UNIT II - VALUE ENGINEERING

(Make or buy decision, Value engineering – Function, aims, Value engineering procedure. Interest
formulae and their applications –Time value of money, Single payment compound amount factor,
Single payment present worth factor, )Equal payment series sinking fund factor, Equal payment series
payment Present worth factor- equal payment series capital recovery factor - Uniform gradient series
annual equivalent factor, Effective interest rate, Examples in all the methods.
PART – A
Q.No Questions BT Level Competence
1 Define value engineering. (BT-1) Remembering
2 Compare the basics of make or buy decision. (BT-2) Understanding
3 Identify the aims of value engineering. (BT-3) Applying
4 Categorise When to apply value analysis. (BT-4) Analyzing
5 List the features of Value Engineering (BT-5) Evaluating
6 Interpret the steps of value engineering. (BT-6) Creating
7 Describe how single-payment compound amount method related to? (BT-1) Remembering

8 Compare Value analysis with Value engineering. (BT-2) Understanding

9 A person wishes to have a future sum of Rs. 1,00,000 for his son’s (BT-3) Applying
education after 10 years from now. What is the single-payment that
he should deposit now so that he gets the desired amount after 10
years? The bank gives 15% interest rate compounded annually
10 Classify the types of estimating time value of money. (BT-4) Analyzing
11 How is time incremental to money value? (BT-5) Evaluating
12 Interpret the reasons of applying value analysis approach. (BT-6) Creating
13 Define Equal Payment Series. (BT-1) Remembering
14 Explain how the concept of value engineering is used in decision (BT-2) Understanding
making.

15 What example can you state for make or buy decision? (BT-3) Applying
16 Classify the various types of equal payment series method. (BT-4) Analyzing
17 What is Capital Recovery Method? (BT-1) Remembering
18 Outline about the sinking fund factor method in equal payment series. (BT-2) Understanding
mm present worth factor of single payment.
19 Define (BT-1) Remembering
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20 Define investment decisions. (BT-1) Remembering

PART – B
1 How would you describe the various approaches of make or buy BT 1
Remembering
decision?
2 i) Compare value analysis (VA)/ value engineering (VE). ( 8
marks)
ii) Explain the symptoms favouring the applications of BT 2 Understanding
VA/VE. (8 marks)

3 i) How would you use value? What are the types of value?
(8 marks)
BT 3
ii) Identify the types of functions? Explain them with Applying
examples. (8 marks)

4 i) Analysis the aims of value engineering? (8 marks)

ii) Categorize the advantages and application areas of value BT 4 Analyzing
engineering. (8 marks)
5 Discuss briefly explain the steps of value engineering. BT 5 Evaluating
6 i) Explain the time value of money. (8 marks)
ii) Prove practical applications of various interest formulas.
BT 6 Creating
(8 marks)

7 Explain the Single payment compound amount factor and

BT 1 Remembering
Single payment present worth factor in detail?
8 Outline uniform gradient conversion method with example. BT 2 Understanding
9 i) What are the various phases of value engineering?
ii)An engineer is considering two types of pressure sensors for a
low pressure steam line. The cost are shown below. How would you
make selection decision based on present worth comparison at an
interest rate of 16% per year?
TYPE X TYPE Y

First cost Rs.76000 Rs.129000

Maintenance Rs. 12000 Rs. 9000 BT 3 Applying
cost (per year)
Salvage value Rs. 0 Rs.20000
Life 24 years.

10 i) What approach would you use while making investment

decisions? BT 4
Analyzing
ii) Classify the time value of money approach.
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11 i)Discuss the computation of future amount if a person deposits a sum
of Rs.1,00,000 in a bank for his son’s education who will be admitted
to a professional course after 6 years. The bank pays 15% interest rate
compounded annually. This happens at the time of admitting his son BT 1
Remembering
in professional course.

ii) Interpret the various steps involved in value engineering

application.
12 A company wants to set up a reserve which will help the company to
have an annual equivalent amount of Rs.1000000 for the next 20
years towards its employee welfare measures. The reserve is assumed BT 2 Understanding
to grow at the rate of 15% annually. Find the single payment that
must be made now as the reserve amount.
13 i) Give practical applications of various interest formulas. Analyzing
ii) A person is planning for his retired life. He has 10 years of
service. He would like to deposit 20% of his salsry which is
Rs.4000, at the end of the 1st year and thereafter he wishes to BT 4
deposit the amount with an annual increase of Rs.5000 for the
next 9 years with an interest rate of 15%Find the total amount
at the end of the 10th year of the above series.
14 Define value analysis. Briefly explain the steps of value engineering. BT 1 Remembering

Remembering
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VALLIAMMAI ENGINEERING COLLEGE
SRM Nagar, Kattankulathur – 603 203.

DEPARTMENT OF MECHANICAL ENGINEERING

QUESTION BANK
SUBJECT : MG6863- ENGINEERING ECONOMICS
SEM / YEAR: VIII / IV
UNIT III - CASH FLOW
Methods of Comparison of alternatives- Present worth method(Revenue dominated cash flow diagram),-Future
Worth method(Revenue dominated cash flow diagram, Cost dominated cash flow diagram)-Annual equivalent
method(Revenue dominated cash flow diagram, Cost dominated cash flow diagram), Rate of Return method,
Examples in all the methods.

PART – A
Q.No Questions BT Level Competence
1 Define present worth method. (BT-1) Remembering
2 Compare the techniques involved for comparing the worthiness of the (BT-2) Understanding
project.

3 Identify the steps in future worth method.(Revenue dominated cash (BT-3) Applying
flow diagram)
4 Categorize cash dominated cash flow diagram to future worth method. (BT-4) Analyzing

5 Discuss the economic life of a project. (BT-5) Evaluating

6 Interpret revenue dominated cash flow diagram to annual equivalent (BT-6) Creating
method.
7 Define Annual equivalent method. (BT-1) Remembering

8 Compare rate of return with cash flow method. (BT-2) Understanding

9 How would you make use of Annual Equivalent method of comparing (BT-3) Applying
alternatives?
10 Categorize the methods of revenue dominated cash flow. (BT-4) Analyzing
11 How will you make decisions in selection of alternatives in economic (BT-5) Evaluating
analysis of investment?
12 Justify the revenue dominated cash flow diagram in present worth (BT-6) Creating

method.
13 Define Rate of Return Method. (BT-1) Remembering
14 Differentiate the cash dominated cash flow diagram in present worth (BT-2) Understanding

method.
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15 Consider the following two mutually exclusive alternatives. (BT-3) Applying

Project A Project B

Cost Rs.4000 Rs.6000

Uniform annual Rs.640 Rs.960

benefit

Useful life years 20 20

Using a 15% interest rate, determine which alternative should be

selected based on the future worth method of comparison.
16 Conclude your understanding on the concept of Compound Interest (BT-4) Analyzing
17 Define the term interest. (BT-1) Remembering
with examples.
18 Illustrate with example for annual equivalent method. (BT-2) Understanding
19 What is Rij method? (BT-1) Remembering
20 State the cash flow method. (BT-1) Remembering

PART – B
1 How would you describe the revenue dominated cash flow diagram? BT 1
Remembering

2 A company invests in one of the two mutually exclusive alternatives.

The life of both alternatives is estimated to be 5 years with the
following investment, annual returns & salvage values.
Alternative
A B
Investment(Rs) -1,50,000 -1,75,000
Annual equal return 60,000 70,000 BT 2 Understanding
(Rs)
Salvage value (Rs) 15,000 35,000
Determine the best alternative based on the annual equivalent method
by assuming i=25%.
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3 i) A company has three proposals for expanding its business
operations.
The details are as follows:
Alternative Initial Annual Life(years)
cost revenue
A 25,00,000 8,00,000 10
B 20,00,000 6,00,000 10
C 30,00,000 10,00,000 10
Each alternative has insignificant salvage value at the end of its
life.
Assuming an interest rate of 15% compounded annually, find the BT 3
Applying
best alternative for expanding the business operations of the
company using the annual equivalent method.
ii) How would you understand the concept of Annual
Equivalent Method? (Revenue Dominated Cash Flow
Diagram)

4 Classify cost dominated cash flow diagram to derive the Annual

Equivalent Method. BT 4 Analyzing

5 i) Discuss about the rate of return method.

ii) Consider the following two mutually exclusive alternatives.
A B

Cost 4000 6000

640 960
Uniform annual
benefit BT 5
Evaluating
20 20
Useful life(in years)
Using interest rate determine which alternative should be selected
based on the future worth method of comparison.
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6 A company must decide whether to buy machine A or machine B.
Machine A Machine B
Initial cost(Rs) 3,00,000 6,00,000
Useful life(years) 4 4
Salvage value at the 2,00,000 3,00,000
end of machine life(Rs) BT 6 Creating
Annual maintenance 30000 0

At 15% interest rate which machine should be purchased?

7 Alpha industry is planning to expand its production operation. It has

identified three different technologies for meetig the goal. The initial
outlay and annual revenues with respect to each of the technologies are
summarised in the table. Suggest the best technology which is to be
implemented based on the present worth method of comparison
assuming 20% interest rate compounded annually.

Initial Annual Life(inyears) BT 1 Remembering

outlay revenue
Technology 1 12,00,000 400000 10
Technology 2 20,00,000 600000 10
Technology 3 18,00,000 5,00,000 10

8 A granite company is planning to buy a fully automated granite cutting

machine. If it is purchased under down payment, the cost of the
machine is Rs. 16,00,000. If it is purchased under instalment basis, then
the company has to pay 25% of the cost at the time of purchase and the
BT 2
remaining amount in 10 annual equal instalments of Rs. 2,00,000 each. Understanding
What is the best alternative for the company using the present worth
basis at i=18%compounded annually.
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9 i) i) Alpha Finance Company is coming with an option of accepting
Rs.10000 now paying a sum of Rs.160000 after 20 years. Beta
finance company is coming with a similar option of accepting
Rs.10000 now and paying a sum of Rs.300000 after 25
years.Compare and select the best alternative based on future worth
method of comparison with 15% interest rate compounded
annually.
ii) ii) Find the best alternative using the annual equivalent method of
comparison. Assume an interest rate of 15% compounded annually.

Alternative A B C BT 3 Applying
Initial cost 5,00,000 8,00,000 6,00,000
Annual receipt 2,00,000 1,50,000 1,20,000
Life (years) 10 10 10
Salvage value 1,00,000 50,000 30,000

iii)
10 A man owns a corner plot. He must decide which of the several
alternatives to select in trying to obtain a desirable return on his
investment. After much study and calculation, he decides that the two
best alternatives are given as in the following table:
iv) Build soft Gas station ice-cream stand
v) First cost 20,00,000 36,00,000
vi) Annual
vii) Property taxes 80,000 1,50,000
viii) Annual income 8,00,000 9,80,000
ix) Life of building 20 20 BT 4
Analyzing
x) (in years)
xi) Salvage value 0 0
xii) i) What is the best alternative based on the future worth method at
i=12%.
xiii) ii. How will you represent the cost-dominated cash flow diagram?
xiv)
xv)
xvi)
H
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11 i) A company provides car to its executive. The owner of the
company is concerned about the increasing cost of petrol. The
cost per litre of petrol for the first year of operation is Rs.21. He
feels that the cost of petrol will be increasing by Re.1 every
year. His experience with his company car indicates that it
averages 9 km per litre of petrol. The executive expects to drive
an average of 20000 km each year for the next four years. What
is the annual equivalent cost of fuel over this period of time? If BT 1
Remembering
he is offered similar service with the same quality on rental
basis at Rs.60,000 per year, should the owner continue to
provide company car for his executive or alternatively provide a
rental car to his executive? Assume i= 18% . If the rental car is
preferred, then the company car will find some other use within
the company.
ii) Discuss in detail about the rate of return method.

12 i) A company must decide whether to buy Machine A or Machine

B.
Machine A Machine B
Initial cost 4,00,000 8,00,000
Useful life(years) 5 5
Salvage value at the
End of machine life 200000 5,50,000
Annual maintenance cost 40000 0 BT 2 Understanding
At 15% interest rate which machine should be selected? ( Use future
worth method of comparison)
ii) Give the formula for rate of return method with an example.

A person is planning a new business. The initial outlay and cash flow Analyzing
pattern for the new business is as follows. The expected life of the
business is five years. Find the rate of return for the new business.
13. BT 4
Period 0 1 2 3 4 5
Cash flow -100000 30000 30000 30000 30000 30000

14. Discuss in detail about the different cash flow methods and also give Remembering
BT 1
their formulas.

Remembering
.
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VALLIAMMAI ENGINEERING COLLEGE
SRM Nagar, Kattankulathur – 603 203.

DEPARTMENT OF MECHANICAL ENGINEERING

QUESTION BANK
SUBJECT : MG6863- ENGINEERING ECONOMICS
SEM / YEAR: VIII / IV
UNIT IV - REPLACEMENT AND MAINTENANCE ANALYSIS
Replacement and Maintenance analysis-Types of maintenance, types of replacement problem,
determination of economic life of an asset, Replacement of an asset with a new asset-capital recovery with
return and concept of challenger and defender, Simple probabilistic model for items which fail completely.

PART - A
Q.No Questions BT Level Competence
1. What is Preventive Maintenance? (BT-1) Remembering
2. Compare Prevention with Maintenance. (BT-2) Understanding
3. How do you understand the concept Break down maintenance? (BT-3) Applying
4. List out the preventive maintenance activities. (BT-4) Analyzing
5. Discuss about the economic life of an asset. (BT-5) Evaluating
6. Can you assess the importance of Replacement policies? (BT-6) Creating
7. What are the types of replacement problem? (BT-1) Remembering
8. Summarize the concept Rate of Return. (BT-2) Understanding
9. Consider the following cash flow of a project: (BT-3) Applying
10. List out the functional elements of maintenance programme. (BT-4) Analyzing
Year : 0 1 2 3 4 5
11. Can you list the different types of maintenance? (BT-5) Evaluating
12. Cash Flow
Can you :10,000
assess 4,000
the reasons 4,500 5,000
for considering 5,500 of equipment?
the replacement 6,000 (BT-6) Creating
13. What arethe
Identify therate
reasons for replacement?
of return of the project. (BT-1) Remembering
14. Compare Maintenance with Scheduled Maintenance. (BT-2) Understanding
15. How would you show your understanding on maintenance in automobile (BT-3) Applying
16. sector?
Conclude your knowledge on Individual Maintenance cost. (BT-4) Analyzing
17. List the features of Planned Maintenance Cost. (BT-1) Remembering
18. Compare Individual and Group Maintenance Cost. (BT-2) Understanding
19. List the features of ‘economic life’ of equipment. (BT-1) Remembering
20. Define Breakdown and Maintenance. (BT-1)
Remembering

PART - B
1. (i) List the features of Maintenance. How would you manage maintenance
in any sector? (8 marks) BT 1
Remembering
(ii)List the causes for replacement of assets in detail. (8 marks)
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2. (a) Find the comparative use value of the old machine.

(b)Is it advisable to replace the old machine?

A machine was purchased two years ago for Rs. 10,000. Its annual
maintenance cost is Rs.750. Its life is six years and its salvage value at the
end of its life is Rs.1, 000. Now, a company is offering a new machine at a BT 2 Understanding
cost of Rs. 10,000. Its life is four years and its salvage value at the end of
its life is Rs.4, 000. The annual maintenance cost of the new machine is Rs.
500. The company which is supplying the new machine is willing to take
the old machine for Rs. 8,000 if it is replaced by the new machine. Assume
an interest rate of 12%, compounded annually.
3. (i)How would you show your understanding in finding the economic life of
an asset? (8 marks) BT 3
(ii)How would you use the concept of challenger and Defender in Applying
replacement?(8 marks)
4. The following table gives the operation cost; maintenance cost and salvage value at
the end of every year of a machine whose purchase value is Rs. 20,000? Find the
economic life of the machine assuming interest rate, i=15%.

End of years Operation cost at Maintenance cost Salvage value at

the end of year at the end of the the end of year

(Rs.) year (Rs.)

(n)
(Rs.)

1 3,000 300 9,000

2 4,000 400 8,000

3 5,000 500 7,000

4 6,000 600 6,000 BT 4 Analyzing

5 7,000 700 5,000

6 8,000 800 4,000

7 9,000 900 3,000

8 10,000 1,000 2,000

9 11,000 1,100 1,000

10 12,000 1,200 0
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5. i) Discuss about Simple probabilistic model for items which fail completely.
(8 marks)
(ii) Two years ago, a machine was purchased at a cost of Rs.2, 00,000 to be
useful for eight years. Its salvage at the end of its life is Rs.25, 000. The
annual maintenance cost is Rs. 1, 20,000. Now, a new machine to cater to BT 5
Evaluating
the need of the present machine is available at Rs. 1, 50,000 to be useful for
six years. Its annual maintenance cost is RS. 14,000. The salvage value of
the new machine is RS. 20,000. Using an interest rate of 12%, find whether
it is worth replacing the present machine with the new machine. (8 marks)

6. Determine the optimum replacement Policy. There are 10,000 bulbs in a

decorative set. When any bulb fails to be replaced, the cost of replacing a
bulb individually is Rs. 1 only. If all the bulbs are replaced at the same
time, the cost per bulb would be reduced to Rs. 0.35. The Percentage of
bulbs surviving at the end of Month (t) i.e. S (t) and the probability of
failures during the month (t) i.e. P (t) are given below.
BT 6 Creating
t 0 1 2 3 4 5 6

S(t) 100 97 90 70 30 15 0

P(t) - 0.03 0.07 0.20 0.40 0.15 0.15

7. What are all the various types of Maintenance? Evaluate their merits and
BT 1 Remembering
demerits.
8. (i)Explain the types of Replacement. (8 marks)
BT 2
Understanding
(ii)Compare replacement and maintenance analysis. (8 marks)
9. Challenger and Defender: Two years ago, a machine was purchased at a cost
of Rs.2, 00,000 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, 20,000. Now, a machine to cater to
the need of the present machine is available at Rs. 1, 50,000 to be useful for
six years. Its annual maintenance cost is Rs. 14,000. The salvage value of BT 3 Applying
the new machine is Rs. 20,000.

Using an interest rate of 12%, how would you find whether it is worth
replacing the present machine with the new machine?
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10. (i)Examine the concept of Capital recovery with return. (8 marks)

(ii) A firm is considering replacement of equipment, whose first cost is Rs.

1,750 and the scrap value is negligible at any year. Based on experience, it
was found that the maintenance cost is zero during the first year and it
BT 4
increases by Rs. 100 every year thereafter. Analyzing

(a) When should the equipment be replaced if i = 0%?

(b)When should the equipment be replaced if i = 12%? (8 marks)

11. (i)What are the factors involved in determination of economic life of an

asset? (8 marks)
(ii)Initial cost of a machine is Rs. 6,00,000,with other details as below:
Year 1 2 3 4 5

Resale Rs. Rs. Rs. Rs. Rs. 96,500 BT 1

Remembering
value 4,20,000 3,00,000 2,04,000 1,44,000

Cost of Rs. Rs. Rs. Rs. Rs.

labour 1,40,000 1,60,000 1,80,000 2,10,000 2,50,000

Determine the optimum period for replacement of the machine. (8 marks)

12. Compare the two alternatives and make an annual equivalent cost analysis
to determine whether to keep or replace the old engine. A diesel engine was
installed 10 years ago at a cost of Rs. 50,000. It has a present realizable
market value of Rs. 15,000. If kept, it can be expected to last five years
more, with operating and maintenance cost of Rs.14, 000 per year and to
have a salvage value of Rs. 8,000 at the end of the fifth year. This engine
BT 2 Understanding
can be replaced with an improved version costing Rs. 65,000 which has an
expected life of 20 years. This improved version will have an estimated
annual operating and maintenance cost of Rs. 9,000 and ultimate salvage
value of Rs. 13,000. Using an interest rate of 15%, make an annual
equivalent cost analysis to determine whether to keep or replace the old
engine.
13. Can you identify the replacement problem and suggest your idea to Analyzing
BT 4
eradicate it.
14. (i)A firm is considering replacement of equipment, whose first cost is Rs.
4,000 and the scrap value is negligible at the end of any year. Based on
experience, it was found that the maintenance cost is zero during the first Remembering
year and it increases by Rs.200 every year thereafter. When should the BT 1
equipment be replaced if i =0%? (8 marks)

(ii) When should the equipment be replaced if i =12%? (8 marks)

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VALLIAMMAI ENGINEERING COLLEGE
SRM Nagar, Kattankulathur – 603 203.

DEPARTMENT OF MECHANICAL ENGINEERING

QUESTION BANK
SUBJECT : MG6863- ENGINEERING ECONOMICS
SEM / YEAR: VIII / IV
UNIT V - DEPRECIATION
Depreciation – Introduction, Straight line method of depreciation, declining balance method of
depreciation – Sum of the years digits method of depreciation, sinking fund method of
depreciation/Annuity method of depreciation, service output method of depreciation – Evaluation of
public alternatives – introduction, Examples, inflation adjusted decisions –procedure to Adjust inflation,
Examples on comparison of alternatives and determination of economic life of asset.
PART - A
Q.No Questions BT Level Competence
1. Define Depreciation? (BT-1) Remembering
2. Compare declining balance method of depreciation and double declining (BT-2)
balance method of depreciation. Understanding

3. How would you use Straight line method of depreciation? (BT-3) Applying
4. What do you think about Benefit cost ratio? (BT-4) Analyzing
5. Can you assess the Sum of the year-digits method of depreciation? (BT-5) Evaluating
6. Interpret sinking fund method of depreciation? (BT-6) Creating
7. List the reasons for inflation? (BT-1) Remembering
8. What is meant by inflation? (BT-2) Understanding
9. Identify the various types of depreciation? (BT-3) Applying
10. What do you think about the effect of inflation? (BT-4) Analyzing
11. Compile your views; a company has purchased an equipment whose first
cost is Rs. 1, 00,000 with an estimated life of eight years. The estimated
salvage value of the equipment at the end of its lifetime is Rs. 20,000. Evaluating
(BT-5)
Determine the depreciation charge and book value at the end of various
years using the Straight line method of depreciation.
12. How would you evaluate the Book Value? (BT-6) Creating
13. List any few objectives on Service output method of depreciation? (BT-1) Remembering
14. Explain any two differences in evaluating alternatives of private and public (BT-2)
sector organizations. Understanding

15. Identify the causes of depreciation? (BT-3) Applying

16. How would you apply the necessities of calculating depreciation? (BT-4) Analyzing
17. List the causes of deflation? (BT-1) Remembering
18. Differentiate straight line method of depreciation and declining balance (BT-2)
Understanding
method of depreciation.
19. Can you recall why do we provide depreciation on fixed assets? (BT-1) Remembering
20. What do you mean by inflation adjusted decisions? (BT-1)
Remembering
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PART - B
1. How would you explain the various methods of depreciation? BT 1
Remembering

2. Explain inflation adjusted decision.

BT 2 Understanding

3. Himalaya Drug Company has just purchased a capsulating machine for Rs.
10, 00,000. The plant engineer estimates that the machine has a useful life
of 5 years and a salvage value of Rs. 10,000 at the end of its useful life.
Compute the depreciation schedule for the machine by each of the following BT 3
Applying
depreciation methods :
(i)Straight line method of depreciation. (8 marks)
(ii) Sum –of-the-year’s digits method of depreciation. (8 marks)
4. Analyze if a 40 year old man is planning for his retirement. He plans to
retire at the age of 60 and estimates that he can live comfortably on Rs.
24,000 per year in terms of today’s rupee value. He can invest his savings
at 15% compounded annually. Assume an average inflation rate of 9% for
the next 30 years. What equal amount should he save each year until he BT 4 Analyzing
retires so that he can make withdrawals at the end of each year commencing
from the end of the 21st year from now that will allow him to live as
comfortably as he desires for 10 years beyond his retirement?
5. (i)Explain the procedure to adjust inflation. (8 marks)

(ii)Find the depreciation annuity by annuity method after three years, the BT 5
Evaluating
initial cost of the machine is Rs.8, 00,000 a salvage value at the end of three
years is Rs. 4, 00,000. Rate of interest 10%.(8 marks)
6. How would you evaluate that in a particular locality of a state, the vehicle
users take a roundabout route to reach certain places because of the presence
of a river? This results in excessive travel time and increased fuel cost. So,
the state governments planning to construct a bridge across the river. The
estimated initial investment for constructing the bridge is Rs. 40, 00,000.
The estimated life of the bridge is 15 years. The annual operation and BT 6 Creating
maintenance cost is Rs. 1, 50,000. The value of fuel savings due to the
construction of the bridge is Rs. 6, 00,000 in the first year and it increases
by Rs. 50,000 every year thereafter till the end of the life of the bridge.
Check whether the project is justified based on BC ratio by assuming an
interest rate of 12%, compounded annually.
7. (i)Define the difference in evaluating alternatives of private and public
organizations. (8 marks)
(ii)A company has purchased an equipment whose first cost is Rs. 1, 00,000
with an estimated life of eight years. The estimated salvage value of the
BT 1 Remembering
equipment at the end of its lifetime is Rs. 20,000. Determine the
depreciation charge and book value at the end of the 5th year using the sum-
0f-the-years-digits method of depreciation. (8 marks
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8. (i)Explain the consideration of the evaluation of the alternative of
constructing a bridge across a river. List the different benefits and costs
related to this alternative. (8 marks) BT 2
Understanding
(ii)How would you compare declining balance method of depreciation and
double declining balance method of depreciation? (8 marks)

9. Robert &Co. Purchased Machinery on 1st April 2002 for Rs. 75,000. After
having used it for three years it was sold for Rs. 35,000. Depreciation is to
be provided every year at the rate of 10% per annum on declining balance BT 3 Applying
method. Accounts are closed on 31st March every year. Find out the profit
or loss on sale of machinery.
10. (i)The cost of a machine is Rs.1, 60,000 and its scrap value is Rs. 40,000.
Estimated life 5 years. Using sum of year’s digits method, determine
depreciation charges for each year. Demonstrate the calculations of the
sum-of-the-years-digits method of depreciation. (8 marks)

(ii)Two mutually exclusive projects are being considered for investment.

Project A1 requires an initial outlay of Rs. 30, 00,000 with net receipts BT 4
Analyzing
estimated as Rs. 9, 00,000 per year for the next 5 years. The initial outlay
for the project A2 is Rs. 60, 00,000, and net receipts have been estimated at
Rs. 15, 00,000 per year for the next seven years. There is no salvage value
associated with either of the projects. Using the benefit cost ratio, which
project would you select? Assume an interest rate of 10%. (8 marks)

11. (i)A company is planning to start an employee welfare fund. It needs Rs.
50, 00,000 during the first year and it increases by Rs. 5, 00,000 every year
thereafter up to the end of the 5th year. The above figures are in terms of
today’s rupee value. The annual average rate of inflation is 6% for the next
five years. The interest rate is 18%, compounded annually. Find the single
deposit which will provide the required series of fund towards employees’
welfare scheme after taking the inflation rate into account. BT 1
Remembering
(8 marks)

(ii) The first coat of a road laying machine is Rs. 80, 00,000. Its salvage
value after five years is Rs. 50,000. The length of road that can be laid by
the machine during its lifetime is 75,000 km. In its third year of operation,
the length of road laid is 2,000 km. Find the depreciation of the equipment
for that year using service output method of depreciation.(8 marks)
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12. A state government is planning a hydroelectric project for a river basin. In
addition to the production of electric power, this project will provide flood
control, irrigation and recreation benefits. The estimated benefits and costs
that are expected to be derived from this project are as follows:

Initial cost = Rs. 8,00,00,000

Annual power sales =Rs. 60,00,000
Annual flood control savings = Rs. 30,00,000 BT 2 Understanding
Annual irrigation benefits =Rs. 50,00,000
Annual recreation benefits =Rs. 20,00,000
Annual operating and maintenance costs = Rs. 30,00,000
Life of the project = 50 years.
Check whether the state government should implement the project (Assume
i=12%)
13. An inland state is presently connected to a seaport by means of a railroad
system. The annual goods transported are 1, 00, 00,000 ton km. The
average transport charge is Rs. 30/ton/km. Within the next 20 years, the
transport is likely to increase by 10, 00,000 ton km per year.

It is proposed to broaden a river flowing from the state to the seaport at a

cost of Rs. 2,50,00,00,000. This will make the river navigable to barges and
will reduce the transport cost to Rs. 10.00/ton/km. The project will be
financed by 10% bond at par. There would be some side effects of the
change-over as follows.
Analyzing
i. The railroad would be bankrupt and be sold for no salvage BT 4

value. The right of way, worth about Rs. 3, 00, 00,000, will
revert to the state.
ii. 300 employees will be out of employment. The state will have
to pay to each of them a welfare cheque of Rs. 48,000/year.
iii. The reduction in the income from the taxes on the railroad will
be compensated by the taxes on the barges.

What is the benefit-cost ratio based on the next 20 years of operation? Also,
check whether broadening the river is justified.

14. (i)A machine is purchased for Rs. 45,000 and has a life of 20 years. Its
salvage value is estimated to be Rs. 3,000. Using the sum of years digits
method, calculate annual depreciation charges for first, sixth, and eleventh,
sixteenth and twentieth years. (8 marks)

(ii)Calculate the Depreciation, accumulated Depreciation and book value for Remembering
BT 1
the following Data using Declined Balance Method.

Initial Investment = Rs. 24,000

Salvage Value = Rs. 3,000

Time = 5 years (8 marks)

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