DEPARTMENT OF MECHANICAL ENGINEERING
MG 6863 ENGINEERING ECONOMICS
FORMULA SHEET
UNIT I
1. ๐๐ธ๐ถ๐ป๐๐ผ๐ถ๐ด๐ฟ ๐ธ๐น๐น๐ผ๐ถ๐ผ๐ธ๐๐ถ๐ = ๐๐๐๐๐๐
๐ผ๐๐๐๐ ร 100
2. ๐ธ๐ถ๐๐๐๐๐ผ๐ถ ๐ธ๐น๐น๐ผ๐ถ๐ผ๐ธ๐๐ถ๐ =๐๐๐ ๐๐ป
๐ถ๐๐๐ ร 100
3. Prime Cost = Direct Material Cost +Direct Labour Cost+ Direct Expenses
4. Factory Cost = Prime Cost + Factory overhead
5. Cost of Production = Factory cost + Office & Administrative overhead.
6. Cost of goods sold = Cost of production+ Opening finished stock-Closing
finished stock.
7. Cost of Sales = Cost of goods sold + Selling and Distribution overhead.
8. Sales = Cost of sales + Profit
9. Selling Price/Unit = Sales/Quantity sold
BREAK EVEN ANALYSIS
s = Selling price/unit
v = variable cost/unit
Q = Volume of production
FC = Fixed cost /period
TC = Total Cost of the firm
S = The total Sales Revenue
1. The total sales revenue(S) of the firm S = s ร Q
2. The total cost of the firm TC = Total variable cost + Fixed Cost
TC = v ร Q + FC
3. Profit = Total sales โ Total cost = ( s ร Q) โ (v ร Q + FC )
4. Break even quantity = ๐น๐ผ๐๐ธ๐ท ๐ถ๐๐๐
(๐๐ธ๐ฟ๐ฟ๐ผ๐๐บ ๐๐ ๐ผ๐ถ๐ธ/๐๐๐ผ๐ โ๐๐ด๐ ๐ผ๐ด๐ต๐ฟ๐ธ ๐ถ๐๐๐/๐๐๐ผ๐ )
๐ต๐ ๐ธ๐ด๐พ ๐ธ๐๐ธ๐ ๐๐๐ด๐๐๐ผ๐๐ = ๐น๐ถ
๐ โ ๐ฃ
5. ๐ต๐ ๐ธ๐ด๐พ ๐ธ๐๐ธ๐ ๐๐ด๐ฟ๐ธ๐ =
๐น๐ผ๐๐ธ๐ท ๐ถ๐๐๐
๐๐ธ๐ฟ๐ฟ๐ผ๐๐บ ๐๐ ๐ผ๐ถ๐ธ/๐๐๐ผ๐ โ ๐๐ด๐ ๐ผ๐ด๐ต๐ฟ๐ธ ๐ถ๐๐๐ /๐๐๐ผ๐ร ๐๐ธ๐ฟ๐ฟ๐ผ๐๐บ ๐๐ ๐ผ๐ถ๐ธ/๐๐๐ผ๐
๐ต๐ ๐ธ๐ด๐พ ๐ธ๐๐ธ๐ ๐๐ด๐ฟ๐ธ๐ = ๐น๐ถ
๐ โ๐ฃ ร ๐
6. Contribution = Sales โ Variable costs
7. Contribution/Unit = Selling price/unit โ Variable cost/unit
8. Margin of Safety = Actual sales โ Break Even Sales
9. ๐๐ด๐ ๐บ๐ผ๐ ๐๐น ๐๐ด๐น๐ธ๐๐ = ๐๐ ๐๐น๐ผ๐
๐ถ๐๐๐๐ ๐ผ๐ต๐๐๐ผ๐๐ร ๐๐ด๐ฟ๐ธ๐
10. P/V RATIO = CONTRIBUTION/SALES
11. BREAK EVEN POINT (BEP) = ๐น๐ผ๐๐ธ๐ท ๐ถ๐๐๐
๐
๐ ๐ ๐ด๐๐ผ๐
DEPARTMENT OF MECHANICAL ENGINEERING
MG 6863 ENGINEERING ECONOMICS
FORMULA SHEET
UNIT II
Notations used:
P = Principle amount
F = Future amount at the end of the year โnโ
n = Number of interest periods
i = Interest rate
A = Equal amount deposited at the end of every interest period
G = Uniform amount which will be added/subtracted period after period to/from
the amount of deposit A1 at the end of the period 1.
Formula :
1. To find the future worth of money F = P ร (1+i)n = P(F/P, i, n)
2. To find the present worth of money P = ๐น
(1+๐)๐ = F(P/F, i, n)
3. Equal payment series compound amount
F = A(1+๐)๐โ1
๐ = A (F/A i, n)
4. Equal payment series sinking fund A = F ๐
(1+๐)๐ โ1 = A (F/A,i,n)
5. Equal payment Series Present worth amount
P = A(1+๐)๐โ1
๐(1+๐)๐ = A (P/A,i,n)
6. Equal payment series capital recovery amount
A = P ๐(1+๐)๐
(1+๐)๐โ1 = P (A/P,i,n)
7. Uniform Gradient series amount equivalent amount
A = A1 + G (1+๐)๐ โ๐๐โ1
๐(1+๐)๐โ1 = A1 + G (A/G,i,n)
8. Effective Interest Rate R = (1 +๐
๐ถ)๐ โ 1 where i = nominal interest rate,
C = Number of interest periods in a year.
DEPARTMENT OF MECHANICAL ENGINEERING
MG 6863 ENGINEERING ECONOMICS
FORMULA SHEET
UNIT III
Present Worth Method of Comparison:
Revenue Dominated Cash Flow Diagram: S
R1 R2 R3 . Rj Rn
0 1 2 3 . j n
P
Pw(i) = - P + R1[ 1/(๐ + ๐)๐] + R2[ 1/(๐ + ๐)๐] + โฆ. +Rj [ 1/(๐ + ๐)๐] +
Rn [ 1/(๐ + ๐)๐] + S [ 1/(๐ + ๐)๐]
Where P = Initial investment
R1, R2, โฆRj = Net Revenue at the end of the 1,2,โฆjth period
S = Salvage Value at the end of the nth year.
In this method the expenditure is assigned a (-) sign with arrow pointing
downwards and the revenue assigned a (+) sign with arrow pointing
upwards
Cost Dominated Cash Flow Diagram: S
0 1 2 . j n
C1 C2 . Cj Cn
P
Pw(i) = P + C1[ 1/(1 + ๐)1] + C2[ 1/(1 + ๐)2] + โฆ. +Cj [1/(1 + ๐)๐] +
Cn [1/(1 + ๐)๐] - S [1/(1 + ๐)๐]
Where P = Initial investment
C1, C2, โฆCj = Net Cost at the end of the 1,2,โฆjth period
S = Salvage Value at the end of the nth year.
In the above formula the expenditures is assigned with (+) sign with the
arrow pointing downwards
In the above formula the revenue is assigned with (-) sign with the arrow
pointing upwards.
Future Worth Method :
Revenue Dominated Cash Flow Diagram:
In this method the expenditure is assigned a (-) sign with arrow pointing
downwards and the revenue assigned a (+) sign with arrow pointing
upwards
S
R1 R2 R3 . Rj Rn
0 1 2 3 . j n
P
FW(i) = - ๐ท(๐ + ๐)๐ + ๐น๐(๐ + ๐)๐โ๐ + R2(๐ + ๐)๐โ๐ +
โฆ ๐น๐(๐ + ๐)๐โ๐ + ๐น๐ + ๐บ
Where P = Initial investment
R1, R2, โฆRj = Net Revenue at the end of the 1,2,โฆjth period
S = Salvage Value at the end of the nth year.
Cost dominated cash flow diagram
S
0 1 2 3 j
P C1 C2 C3 Cj Cn
FW(i) = ๐ท(๐ + ๐)๐ + ๐ช๐(๐ + ๐)๐โ๐ + C2(๐ + ๐)๐โ๐ +
โฆ ๐ช๐(๐ + ๐)๐โ๐ + ๐ช๐ โ ๐บ
Where P = Initial investment
C1, C2, โฆCj = Net Cost at the end of the 1,2,โฆjth period
S = Salvage Value at the end of the nth year.
In the above formula the expenditures is assigned with (+) sign with the arrow
pointing downwards
In the above formula the revenue is assigned with (-) sign with the arrow
pointing upwards.
Annual equivalent method
In the annual equivalent method first the revenue of each alternative will be
computed. The alternative with the maximum annual equivalent revenue in the
case of revenue comparison or with the minimum annual equivalent cost in the
case of cost dominated comparison will be selected as the best alternative
Revenue Dominated Cash flow diagram S
R1 R2 R3 . Rj Rn
0 1 2 3 j n
Steps :
1. In this method the first step is to find the net present worth using the
formula
PW(i) = - P + R1[ 1/(๐ + ๐)๐] + R2[ 1/(๐ + ๐)๐] + โฆ. +Rj [ 1/(๐ + ๐)๐] +
Rn [ 1/(๐ + ๐)๐] + S [ 1/(๐ + ๐)๐]
Where P = Initial investment
R1, R2, โฆRj = Net Revenue at the end of the 1,2,โฆjth period
S = Salvage Value at the end of the nth year.
In this method the expenditure is assigned a (-) sign with arrow pointing
downwards and the revenue assigned a (+) sign with arrow pointing
upwards
2. The annual equivalent revenue is computed using the following formula
A = PW(i) ๐(1+๐)๐
(1+๐)๐โ1
A = PW(i) (A/P,i,n)
A = - P (A/P,i,n) + A + S (A/F,i,n)
Where (A/P,i,n) is called equal payment series capital
recovery factor.
3. The above steps 1 and 2 are repeated for all the alternatives
4. Finally the alternative with the maximum annual equivalent revenue
should be selected as the best alternative.
Cost Dominated Cash flow diagram
S
0 1 2 3 j
P C1 C2 C3 Cj Cn
Steps :
1. In this method the first step is to find the net present worth using the
formula
FW(i) = ๐ท(๐ + ๐)๐ + ๐ช๐(๐ + ๐)๐โ๐ + C2(๐ + ๐)๐โ๐ +
โฆ ๐ช๐(๐ + ๐)๐โ๐ + ๐ช๐ โ ๐บ
Where P = Initial investment
C1, C2, โฆCj = Net Cost at the end of the 1,2,โฆjth period
S = Salvage Value at the end of the nth year.
In the above formula the expenditures is assigned with (+) sign with the
arrow pointing downwards
In the above formula the revenue is assigned with (-) sign with the arrow
pointing upwards.
2. The annual equivalent revenue is computed using the following formula
A = PW(i) ๐(1+๐)๐
(1+๐)๐โ1
A = PW(i) (A/P,i,n)
A = P (A/P,i,n) + A - S (A/F,i,n)
Where (A/P,i,n) is called equal payment series capital
recovery factor.
3. The above steps 1 and 2 are repeated for all the alternatives
4. Finally the alternative with the minimum annual equivalent revenue
should be selected as the best alternative.
(OR)
Alternate Approach
1. Step 1 : Find the future worth of the cash flow diagram for the
Given alternatives.
2. Step 2 : The annual equivalent cost is calculated using the formula
A = F๐
(1+๐)๐โ1 (or) A = F (A/F,i,n) where (A/F,i,n) is called
equal payment series sinking fund factor.
UNIT V
1. Straight line method of depreciation:
Depreciation Dt = (P-F)/n
Book value = Bt-1 โ Dt = P-t [(P-F)/n]
Where P = First cost of the asset
F = Salvage value, n = number of years,
Dt = depreciation amount for the period โtโ
Bt = Book value at the end of the period โtโ
2. Declining Balance method of Depreciation :
Depreciation Dt = K x Bt-1
Book value Bt = (1-K) Bt-1
Where K = a fixed percentage
For double declining balance method K = 2/n
3. Sum of Years Digits Method of Depreciation :
Sum of years = n(n+1)/2
Rate = year/ sum of years
Dt = Rate (P-F)
Bt = Bt-1 - Dt
Dt = ๐โ๐ก+1๐(๐+1)
2
(๐ โ ๐น)
Bt = (๐ โ ๐น)(๐โ๐ก)
๐ (๐โ๐ก+1)
(๐+1)+ ๐น
4. Sinking fund Method of Depreciation :
A = (P-F) [A/F,i,n]
Dt = (P-F) x [A/F,i,n] (F/P,i,n)
Bt = P โ (P-F) (A/F,i,n) (F/A,i,n)
5. Service Output method of Depreciation :
Depreciation = (P-F)/ X
Depreciation = (๐ทโ๐ญ)
๐ฟ (๐)
X = Maximum capacity
x = quantity of service rendered for a period.
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