VTU Mechanical Engineering (Semester 7)
Engineering Economy
December 2014
Total marks: --
Total time: --
(1) Assume appropriate data and state your reasons
(2) Marks are given to the right of every question
(3) Draw neat diagrams wherever necessary

1 (a) Explain Law of Return
6 M
1 (b) Deduce an expression for uniform series capital recovery factor, with the necessary cash flow diagram. Firstly derive F = P(Hi)deg; and then proceed.
8 M
1 (c) Assume that you sold a property today for Rs.242100 and that you had purchased the property 4..years ago with Rs.2,00,000 withdrawn from your saving account. During the 4 year period your savings would have earned 6% compounded quar,terly. For a comparison of the investments, calculate the nominal interest rate received from your property purchase.
6 M

2 (a) Explain Pay back comparison method
4 M
2 (b) A newly developed electric car will cost 21000 to,purchase. Operating and maintenance costs, including home charging of the batteries, are estimated to be Rs.350 for the first year with annual increase there after of Rs.50 per year. Salvage value after 5 years is estimated to be Rs.6500. A new gasoline runabout will cost Rs.16000 and will average 30 miles per gallon. Gasoline costs Rs. 1.26 per gallon is expected to increase at a rate of Rs.0.05 per year each of the next 4 years maintenanCe costs are estimated to be Rs.300 per year including warranty coverage. Salvage value is estimated to be Rs.1500 after 5 years of service. If the vehicles are expected to be d_riven for 20.000 miles per year, determine which option will have the lower cost over 5 years (use present worth analysis) with a 10% rate of interest
10 M
2 (c) A small company purchased now for 23000 will lose 1200 each year the first 4 years. An additional 8000 investment in the company during the fourth year will result in a profit 5500 each year from the ,5th year through the 15th year. At the end of 15 years. The company can be sold for Rs 33,000 MARR-12%.
6 M

3 (a) Explain the Situations for EAC and EAW comparisons.
4 M
3 (b) A city maintenance crew has had experience with a conventional back hoe that suggests that its service life is 6 years. A newly designed machine costs 50o% more than the conventional machine but is quieter in operation, which will make it more adoptable to residential neighbourhoods. Both machines will have about the same operating costs, and salvage costs are expected to be negligible. What will be the service life of the new backhoe have to be to make its cost comparable to that of the conventional machine at i=10%?
8 M
3 (c) A sheltered workshop requires a lift truck to handle pallets for a new contract. A lift truck can be purchased for Rs.270000. Annual insurance costs are 3% of the purchase price, payable on the first of each year. An equivalent truck can be rented Rs.15000 per month payable at the end of each month. Operating costs are same for both alternatives. For what minimum number of months must a purchased truck be used on the contract to make purchasing more attractive than leasing? Interest is 12% compounded monthly. Assume that the purchased truck has no salvage value.
8 M

4 (a) List and discuss the causes for depreciation
4 M
4 (b) An automobile company is planning to buy a robot for its forging unit. It has identified two different companies for the supply of the robot. The details of cost and incremental revenue of using robots are summarized in the following table:
  Speedex Giant
Initial cost (RS) 5,00,000 9,00,000
Annual incremental revenue(RS) 80,000 2,50,000
Life (yrs) 8 8
Salvage value(RS) 40,000 60,000

The MARR for the company is 12%. suggest the best brand of robot to the company based on the ROR method.
10 M
4 (c) A local transport company wants to purchase a Volvo heavy duty truck for 35 Lakh. The company assures that the truck can run 15 Lakh kilometer during its 10 years of operation. The salvage value of life period is Rs.8 Lakh. If the truck has already run for this year of operation 10 Lakh kilometer, find the depreciation of the truck at this period
6 M

5 (a) Differentiate between estimation and costing
4 M
5 (b) The expenditure incurred in manufacturing a machine is as follow:
    Amount (Rs)     Amount (Rs)
1 Material consumed 5500000 9 Direct wages 6500000
2 indirect factory wages 800000 10 Factor rent 60000
3 Directors fee 300000 11 Telephone and postage 15000
4 Advertisement 100000 12 Gas and electricity
5 Net profit 120000 13 Office salaries 210000
6 Depreciation on sales departments car 11000 14 office rent 50000
7 Printing and Stationary 2500 15 Showroom rent 150000
8 Depreciation of plant 45000 16 Salesman's commission 26500
      17 Sales department car expenses 15000

Determine: i) Direct cost; ii) Factory cost; iii) Total cost of production iv) Cost of sales; v) Selling price
9 M
5 (c) The catalogue price of a washing machine is Rs.9000 and the commission allowed to the proprietor of the showroom is 20%. The administrative and the selling expenses are 60% of the factory cost and material cost, labour cost and factory overheads ; r the ratio of 2:3:1. If the cost of the labour on the manufacture of machine is Rs.1650, determine the profit , each washing machine.
7 M

6 (a) Differentiate between debentures and shares.
4 M
6 (b) The following is the trial balance of Mr. Ratan associates for the year ending 31st March 2014, prepare trading accounts profit and loss account and balance sheet:
Properties Dr Cr
Sales   21500
Purchased 135500  
Sales return 3000  
Purchased return   2000
Sundry debtors 30500  
Sundary creditors   20600
Opening creditors 20400  
Salaries and wages 27500  
Furniture 6600  
Repair to shop 3200  
Postage and telegrams 2800  
Power and electricity 500  
Trade expense 1200  
Rent and taxes 4800  
Bad debts 750  
Fixed deposit in blank 13500  
Interest on deposit   750
Insurance 600  
Pre-paid insurance 200  
Cash in hand 550  
Bank balance 2300  
Outstanding salaries   2200
Depreciation on furniture 1000  
Drawings 4000  
Capital   18350
  258900 258900

Closing stock was valued at Rs 19500
16 M

7 (a) Make an assessment of comparative position of the firms A, B and C after taking the following data. Calculate the relevant ratio and comment on it
Particulars Firm A Firm B Firm C
Avg inventory 1000000 1500000 2000000
Sales 6600000 8359000 8960000
Cost of goods sold 6000000 7500000 8000000
Expenses of managements 500000 760000 1000000
Receivables 1320000 2497500 3584000
10 M
7 (b) Briefly explain the following ratios:
i) Leverage ratio; ii) Activity ratio; iii) Profitability ratios
10 M

8 (a) Briefly explain Bench marking of manufacturing operation
5 M
8 (b) A manufacturing company has a production capacity of 20,000 units of product A. The expenses for the production of 10,000 units for a eriod is as follows:
Particulars Cost/unit Rs
Materials 40
Wages 10
VOH 10
Manufacturing expenses (40% fixed) 10
Administrative (all fixed) 5
Selling and distribution expenses (50% fixed) 5
Profit 20
Selling 100

Prepare a flexible budget to show 70 and 100% level of activity. It is expected that the present unit selling price will remain constant up to 60% beyond which 5% reduction is contemplated up to 100% level of activity. Also give your opinion an which level of activity should be selected.
15 M

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