EET ate) T83 Type A: Sensitivity Analysis 1. Perform sensitivity analysis using Pw method over a range of (+ or -) 20% in a, Initial investment b, Net annual revenue c, Salvage value Initial investment (Rs.) = 2,00,000 Annual revenues (Rs.) = 50,000 Annual expenses (Rs,) = 5,000 Salvage value (Rs.) = 25,000 Useful life = 10 years MARR = 12% per year {2019 Spring, 2024 Fall] Solution: Initial investment, I = Rs. 2,00,000 Annual revenues, R = Rs, 50,000 Annual expenses, E = Rs. 5,000 MARR = 12% per year Useful life = 10 year - Salvage value, S = Rs. 25,000 We have, Piv(12%) =I + (R - E)(P/A,i%,N) + S(P/F,i%,N) =~2,00,000 + (50,000 — 5,000)(P/A, 12%, 10) + 25,000(P/F, 12%, 10) =+2,00,000 + 45,000 x 5.6502 + 25,000 x 0.3220 =Rs. 62309 a. When initial investment (1) varies + 20% AtI=-20% Pw =~2,00,000(1 - 0.2) + 45,000(P/A,12%,10) + 25,000 (PIF, 12%, 10) 2,00,000x 0.8+ 45,000 x 5.6502 + 25,000 x 0.3220 Rs, 1,02,309. [ER] + Engineering EconomicsAtl=20% Pw =-2,00,000(1+0.2) + 45,000(P/A,12%,10) + 25,000 (PIF, 12%, 10) =~-2,00,000 1.2 + 45,000 x 5.6502+ 25,000x 0.3220 + =Rs. 22309 ‘When net annual revenue varies +20% AtA-R=+20% Pw =-2,00,000+45,000(1+0.2) x (P/A,12%,10) + 25,000 (P/F,12%,10) -2,00,000 + 45,000 1.2 x 5.6502 + 25,000x0.3220 =Rs. 1,13,160.8 AtA-R=-20% 00,000 + 45,000(1-0.2)(P/A,12%,10) + 25,000 (PIF, 12%, 10) =~2,00,000+ 45,000 x 0.8 x 5.6502 + 25000 x 0.3220 =Rs, 11,457.2 . When salvage value varies +20% At,S=-20% Pw =~2,00,000 + 45,000(P/A,12%,10) + 25,000(1 — 0.2) x (PIF, 12%, 10) =-2,00,000+45,000 x 5.6502 + 25,000 x 0.8 x 0.3220 S ° = 60699 AtS=+420% Pw =~2,00,000 + 45,000(P/A,12%,10) + 25,000 x 1.2 x 03220 =~2,00,000 + 45,000 x 5:6502 + 25000 x 1.2*0.3220 = 63919 Sensitivity table Pw(l2%) Paruneter gon 0 +20 I 1,02,309 | _ 62309 22309 AR 11,457.2_| 62309 _ | _1.13,160.8 s 60699 62309 63919 Risk Analysis #2. Perform sensitivity analysis of the following project over the range of +20% for ; i. Initialinvestment - ii. Annual revenue ~ iii, Useful life and iv. MARR Initial investment = 11,500 Annual revenue = 3,000 Salvage value = 1,000 Useful life = 6 years MARR=12% [2023 Spring] Solution: ; Initial investment, I = Rs. 11,500 Annual revenue, AR = 3,000 Salvage value, S=Rs. 1,000 MARR = 10% per year Useful life = 6 year Pw(12%) =-11,500+3,000(P/A,12%,6)+1,000(P/F,12%,6) =-11,500 + 3,000 x 4.1114 + 1,000 x 0.5066. Rs. 1340.88 i, When initial investment varies +20% Atl=-20% Pw =—11,500(1-0.2) + 3000 x 4.1114 + 1,000 x 0.5066 = 3640.8 AtI=420% Pw=-11,500(1+0.2) + 3000 x 4.1114 + 1000 x 0.5066 =-959.2 ii, When annual revenue varies +20% AtAR =-20% " Pw =-11,500 + 3000(1-0.2) x 4.1114 + 1000 x 0.5066 Pw =-11,500 + 3000(1 + 0.2) x 4.1114 +.1000 x 0.5066 = 3807.64 iii, When useful life varies +20% AtN=-20% [Note: 6 - 0.2 x 6 = 4.8 years] # Engineering Econor 7AtN=-20% Pw =~11,500 + 3000(P/A,12%,4.8) + 1000(P/F,12%,4.8) an =-11,500 +3000 (oF + 1000(1 + iy id+i 1+0.12)8— 1 =-11,500+ 3000 (ae +1000(140.12)4 = 430.43 AtN=+20% [Note: 6 + 0.2 x 6=7.2 years] i 11-1 ce Pw=-11,500 + 3000 O1x1172|* 1000 x 1.1 = 3899.40 iv. MARR When MARR ==20% [Note: 12 = 0.2 x 12 = 9.6%] Pw el 1,500 + 3,000(P/A,9.6%,6) + 1000(P/F,9.6%,6) a : =-11,500 + 3,000 (atl 1o00(1 + iy id +i) + e- =-11,500+3,000 40.096 | *1000(1+0.096)* 0.096(1+0.096) = 2297.32 “When MARR = +20% [Note: 12+ 0.2 12= 14.4] Pw =—11,500+3,000(P/A,14,4%,6) + 1000(P/F,14.4%,6) ‘ =-11,500+ 3009 -U+0-144)-1 | #1000 140.148)* 0.444(1+0.144) = 485.44 Sensitivity table _ + Pw(12%) Parameter 20% 0 120% I 3604.8 1340.8 -959.2 AR —1126.04 1340.8 3807.64 N ~430.43 1340.8 3899.40 MARR 2297.32 1340.8 485.44 Risk Analysis #3. Perform sensitivity analysis of the following over a range of -10% to +30% in initial investment, -10% to 10% in useful life and -20% to 20% in MARR. Draw sensitivity diagram and decide the most sensitive parameter. Initial cost| Annual income Useful life Salvage value MARR 20 crore 3 crore 0 10% ‘Solution: I= Rs. 20,00,00,000 N=30 years AR =3,00,00,000 S=0 MARR = 10% Pw(10%) =-20,00,00,000+ 3,00,00,000 (P/A, 10%, 30) =~20,00,00,000 + 3,00,00,000 x 9.4269 30 years =Rs, 8,28,07,000 = 8.28 crore a. Initial investment When I=-10% ~ Pw= -20,00,00,000(1-0.1) + 3,00,00,000 (P/A,107%,30) =-20,00,00,000 x 0.9 + 3,00,00,000 x 9.4269 = Rs. 10,28,07,000 = 10.28 crore When I = +30% Pw=—20,00,00,000(1+0.3) + 3,00,00,000(P/A,10%,30) =-20,00,00,000 x 1.3 + 3,00,00,000 x 9.4269 = Rs. 2,28,07,000 = 2.28 crore When I= +10% Pw = 6,28,07,000 = 6.28 crore When I = -30% - a Engineering Economics . [2018 Fall]Pw= Rs, 14,28,07,000 = 14.28 crore Useful life When N = -10% [Note: 30 - 0.1 x 30 = 27 years] Pw=—20,00,00,000 + 3,00,00,000 (P/A, 10%, 27) =~20,00,00,000 + 3,00,00,000 x 9.2372 = 77116000 = 7.71 crore ee ‘When N = +10% [Note: 30 eT x 30 = 33 years] w= -20,00,00,000 + 3,00,00,000 (P/A, 10%, 33) 33 =-20,00,00,000 + 3,00,00,000 [ 140.1 4) 01x LI = 8708200 = 8.70 crore c. MARR [Note: 10 — 20% of 10 = 8%] When MARR =~20% TfMARR declines by 20% i.e. MARR = 8% Pw= -20,00,00,000 +.3,00,00,000 (P/A, 8%, 30) 0,00,00,000 + 3,00,00,000 x 11.2578 '3,77,34,000 = 13.77 crore When MARR = +20% [Note: 10 + 20% of 10 = 12%] Pw=-20,00,00,000 + 3,00,00,000 (P/A, 12%, 30) = -20,00,00,000 + 3,00,00,000 x 8.0552 16,56,000 =4,16 crore Sensitivity table - ie Pw(10% [rane =20% |-30%| 0 |10% |20%|30% [1 {10.28 | 12.28 | 14.28 [8.28] 6.28 | 4.28|2.28 [ow [an - [= [s2slao] - | - Lwarr: [| - [13.77] - [a2s] - [aie] - Risk Analysis +Since, MARR parameter of the project is highly sensitive compare to other parameter. It is followed by investment parameter and useful life parameter respectively. 4. Analyze the sensitivity of present worth to 440% deviation change of the project having investment = Rs. 11,500, useful life = 10 years, MARR = 10% on i. Interest , ii. Life [2017 Spring] Solution: N= 10 years MARR = 10% R=Rs. 2,500 E=Rs. 2,000 - 1=Rs. 11,500 S=Rs. 1,000 Using Pw formulation Pw(i%) =I + (R— E)(P/A,10%,10)+1000(P/F,10%,10) = 11,500 + (5000 - 2000) (P/A, 10%, 10) + 1000 | (P/F, 10%, 10) | + ==11,500 + 3000 x 6.1446 + 1000 = 0.3855 =Rs. 7319.3 . i, Interest [Note: 10 - 40% of 10 = 6%] = —11,500 + 3000(P/A,6%,10) + 1000(P/F,6%,10) =-11,500 + 3000 x 7.360 + 1000 x 0.5584 = 11,1387 AtMARR = +40% [Note: 10 + 40% or 10 = 14%] Pw=-11,500 + 3000(P/A,14%,10) + 1000(P/F,14%, 10) =-11,500 + 3000 x 5.2161 + 1000 x 0.2697 = 4418 * ii. Life AtN=~40% [Note: 10 - 40% of 10 = 6 years] | # Engineering EconomicsPw= 11,500 + 3000(P/A, 10%, 6) + 1000(P/F, 10%, 6) = 11,500 + 3000 x 4.3553 + 1000 x 0.6209 =Rs. 2186.8 AtN=+40% [Note: 10 + 40% of 10 = 14 years} Pw=—11,500 + 3000(P/A, 10%, 14) + 1000(P/F,10%, 14) =—11,500 + 3000 x 7.3667 + 1000 x 0.2633 =Rs, 10863.4 Sensitivity table | Pw(l0%) parametet | ae =40veemalls 0 +40% MARR__| 1,138.7 | 7319.3 4418 Life 2186.8 7319.3 | 10863.4 5, Perform the sensitivity analysis of the following project over the range of +25% in, i, Initial investment ii, Annual revenue iii, Useful life Initial investment = 11,500 Annual: revenue = 3,000 Salvage value = 1,000 MARR = 10% per year Useful life = 6 year (2015 Fall] Solution: ‘ 1= 11,500 AR = 3000 $=1000 MARR = 10% per year Useful life, N= 6 year Now, Pw(10%) = -11,500 + 3,000(P/A,10%,6)+1000(P/F,10%,6) =-11,500 +3,000 x 4.3553 + 1000 x 0.5645 =Rs. 2130.4 Risk Analysis # [EBi, Initial investment When I =-25% Pw=-11,500 x (1-0.25) + 3000 x 4,3553+1,000x0.5645 = 5005.4 When 1=+25% . Pw=-11,500(1+0.25) + 3000 x 4.3553 + 1000 x 0.5645 =-144.6 Annual revenue When AR = -25% Pw=—11,500+3000(1-0.25)*4.3553+1000%0.5645 =-Rs, 1136.075 : When AR = 25% Pw= -11,500+3000(1+0.25)%4.3553+1000x0.5645 5. $396.87 iii, Useful life When N=~25% [Note: 6 -25% of 6 = 4.5 years] Pw=-11,500+3000(P/A,10%,4.5)+1000(P/F,10%,4.5) Wise =+11,500 + 300( Cai] 10000 +i 4.5, ==11,500 + 300 rot] + 1000(1+0.1) + 0.1(1 + 0.1) e =-385.60 When N= +25% x 1-1 18 Pw =-11,500+3000[ ates] + 1000 * 1.1 =Rs, 4310.96 Sensitivity table vedi _ 0 +25% I 5005.4 2130.4 -744.6 AR =1136,075 2130.4 5396.87 N -385,.60 2130.4 4310.96 Engineering Economics¢. Perform the sensitivity analyzing using Pw method, Choose the suitable range that you prefer. Initial investment = Rs. 1,00,000 Annual revenue = Rs, 40,000 Annual expenses = Rs. 5,000 Salvage value = Rs. 1000 Life = 6 years MARR = 12% per year i, Initial investment ii, Annual revenue_ iii. Useful life Solution: Pw(12%) = —1,00,000+(40,000-5,000)(P/A,12%,6) + 1000 (PIF, 12%,6) =—1,00,000 + 35,000 x 4.1114 + 1,000 x 0.5066 =Rs. 4,405.6 Assume variation of 20% i, Initial investment When I= +20% Pw=-1,00,000 x 1:20 + 35,000 x 4.1114+1000 x 0.5066 = Rs. 24,405,60 When I =-20% : Pw=-1,00,000 x 0.8 + 35,000 x 4.1114+1000 ~ 0.5066 = Rs. 64,405.06 ii, Annual revenue When AR = +20% Pw=~1,00,000 + 35,000 x 4.1114 x 1.20+1000 x 0.5066 =Rs, 73,185.60 When AR =-20% Pw=—1,00,000 + 35,000 x 4.1114 x 0.8 + 1,000 x 0.5066 = Rs, 15,625.8 Ail, Useful life ‘When N = +20% [Note: 6 + 20% of 6 = 7.2 years] Risk Analysis @ Ea [2018 Spring]Pw=—1,00,000 + 35,000 (P/A, 12%, 7.20) + 1000 (PIF, 12%, 7.20) 4 By?4 =-1,00,000 + 35,000 (eel +1000 0.1201 + 0.12)" (10.1279 =-1,00,000 + 35,000 x 4.6483 + 1000 x 0.4422 =Rs. 63,143.7 When N=~-20% [Noté: 6 — 20% of 6 = 4.8 years] Pw=—1,00,000 + 35,000 (P/A, 12%, 4.8) + 1000 (PIA, 12%, 4.8) 48 ll =~1,00,000+35,000 fare +1,000x1. 12"s 1,00,000 +35,000 x 3.4964 + 1000 x 0.5804 = Rs. 22,954.40 ‘i Sensitivity table Pw(12%) Parameter 30% 0 +20% I 64,405.06 44405.6 24,405.6 AR 15625.8 44405.6 73,185.4 N 22,954.40 44405.6 63,143.7 ‘Type B: Break-even Analysis = 7. What is break even analysis? Phewa cement shop open the market to sell 10,000 bags of cement in one month, the shop purchase the cement at the rate Rs. 650 in bulk and sell at the rate of Rs. 800. What will be the break- even quantity, if the shop sold all the quantities what will be the profit or loss, when the shop pay Rs, 15,000 for rent and Rs. 5000 for salary? Initial investment was Rs. 65,00,000. [2022 Fall) Solution: : Break even analysis: It determines the value of a critical factor at which economic trade off are balanced. + Engineering EconomicsNo. of cement bags sell in 1 month = 10,000 bags. Rate of purchase of cement = Rs. 650. Sell rate of cement = Rs. 800 Shop rent = Rs. 15,000 Salary = Rs. 5000 Now, Variable cost, Cy = 10,000 x 650 = 65,00,000 . Fixed cost, Cr = 15,000 + 5,000 = 20,000 Total cost, Cr = Cy,+ Cr = 65,00,000 + 20,000 = 65,20,000 65,00,000 10,000 = 650 per unit Selling price per unit, SP = 850 per unit Total sells cost = 850 x 10,000 = Rs. 85,00,000 Variable cost per unit, Vo= ‘ ¢ Breakeven output volume = BV __ 20,000 ~ 850 — 650 = 100 units And, Profit= Total sales‘amount — Total cost = 85,00,000 - 65,00,000 = Rs. 20,00,000 Tf sales = Rs. 80,000, fixed cost = Rs. 15,000, variable cost = Rs. 35,000. Find profit and break even volume.(2017 Spring] ‘Solution: Fixed cost, Cr = Rs. 15,000 Variable cost Cy = Rs. 35,000 Sales cost, Sr = Rs. 80,000 Profit=? Breakeven volume = ? We know, Let production unit = 1,000 units = Q Risk AnalysisTotal cost, Cr= Cr+ Cy = 15,000 + 35,000 =Rs. 50,000 5 35,000 Variable cost per unit, Vc = 100° =35 per unit 5 ' “eg, 80,000 Selling price per unit, Sp="Tqqq = 80 per unit C oo atees Breakeven output volume =< Ve = 15,000 ~ 80-35 = 333.33 units And, Profit = Total sales amount ~ Total cost = 80,000 — 50,000 = 30,000 9. Flower shopkeeper want to bunch of rose one Rs. 100, the shop need to pay Rs. 10,000 for a rent and Rs. 15,000 for the helper, 98 he-could sell the bunch of rose on Rs. 125. How much quantity the bunch of flowers need to sold to meet break-even point? [2020 Fai Solution: Variable cost, Cy = 100 x D’ Where, D = Quantity of rose Fixed cost, Cp = Rs. 10,000 + Rs. 15,000 =Rs. 25,000 Total cost, Cr = Cy + Cr = 100D + 25,000 Total revenue, TR = 125 x D BM] + Engineering EconomicsNow, for break-even point Cy=TR or, L00D + 25,000 = 125 xD *. D= 1000 Hence, the shopkeeper must sell 1000 roses to meet the "break-even point. 40. From the following information, conduct scenario analysis based on FW formulation. Assume I = Rs. 2,25,000, MARR = 13.5% life of project is 5 years. Also, given your remains based on results different scenarios. Worst case |Most likely| Base case scenario | scenario | scenario Annual sales 86,000 1,10,000 | 1,37,000 Annual variable cost} 37,000 40,000 | 38,000 Annual fixed cost 21,000 20,000 18,000 Variable considered Salvage value 40,000 50,000 60,000 (2018 Spring] Solution: I=Rs. 2,25,000 MARR = 13.5% N=Syears i. Worst case scenario. FW(13.5%) = -2,25,000(F/P,13.5%,5) + (86,000-37,000 =21,000)(F/A, 13.5%,5) + 40,000 = -2,25,000%1,8836+28,000*6.5448+40,000 Rs. 2,00,556.60 (loss) ii, Most likely scenario. FW(13.5%) = -2,25,000(F/P, 13.5%,5)+(1,10,000-40,000 — 20,000)(F/A,13.5%,5) + 50,000 =~ 2,25,000 x (1+0.135)° + 50,000 (1 +.0.135)°-1 [ TiS ]+50,000 =-Rs, 46556.651 (loss) | Risk Analysis #iii, Best case scenario, FW(13.5%) = -2,25,000(F/P, 13.5%, 5) + (1,37,000 — 38,000 — 18,000)(F/A,13.5%,5) + 60,000 = Rs. 1,66,318.80 (profit) Scenario analysis indicates that there is risk for investment in worst case and most likely case while there is no risk in best case scenario. 11. An estimation of a new model generator has the following information. Determine, how jong will it operates for break-even point? \Purchase cost (Rs.) + _|3,00,000 Annual maintenance (Rs.) 8,000 Annual energy generated at full load 12,000 Kw Value of energy generated Rs. 3/Kw-her Salvage value (Rs.) 60,000 IMARR 8% per year [2024 Spring] Solution: Annual revenue = Energy generated x Rate — Maintenance = 12,000 x 3— 8000 =Rs. 28,000 Now, N=? Setting equality between income and expenses by Fw method 3,00,000(F/P,8%,N) = 28,000(F/A,8%,N) + 60,000 an or, 3,00;000(1+i)* = 28000 ae ta | + 60,000 N or 300000014008)" = 28000[ 8°78 "+ 60,000 oo N=22.84 years 12. Which motor would you select if you have to operate 12 hours a day? [2019 Fall] Engineering EconomicsMotor A Motor B Purchase price Rs. 3,00,000 Rs. 4,00,000 [Capacity 2HP 2 HP Efficiency 75% 90% Annual cost Rs. 30,000 Rs. 25,000 \Electricity cost Rs. 10 per KW_|_ Rs. 10 per Kwh [Life in years 5; ul [2019 Fall ‘Solution: ‘Time of operation = 12 hours a day Motor A: Purchase price, I = Rs. 3,00,000 Capacity =2 HP =2x 0.746 =14Kw Efficiency, n = 75% Annual cost, C = Rs. 30,000 Electricity cost, E = Rs. 10 per Kwh Life in years, N= 5 years Let, MARR, i= 10% We use co-terminated assumption with salary period, N=7 years Output 15 Input power= "P= 9395-2 Kw Now, Electricity cost per year, E=2 x 12 365 x 10 = Rs. 87,600 Now, Future worth at end of year 7; Fw(10%) = [-3,00,000(F/P,10%,5) — (3,00,000 + 87,600) (F/A,10%,5)(F/P,10%,2)] = (-3,00,000 « 1.61 ~ 1,17,600 x 6.11) x 1.21 =-Rs, 14,53,858.56 Risk Analysis #Motor B Purchase price, I = Rs. 4,00,000 Capacity = 2HP = 1.5 Kw. Efficiency, 1 = 90% Annual cost, C = Rs. 25,500 Electricity cost, EC = Rs. 10 per kwh Life in years, N=7 Output q 5. = 9.97 1.67 kw Electricity cost per year, E = 1.67 x-12 x 365 = 10 zi =Rs. 73,146 Input power = Now, Future worth at end of year 7; FW(10%) = -4,00,000(F/P, 10%, 7) — (25,500 + 73,146) (F/A,10%,7) =—4,00,000 x 1.95 - 98,646 x 9.49 =Rs, -17,16,150.54 Since, FW of motor A is greater than motor B, I would select motor A. 13. How many hours per day would the following motors have to be operated at full load for a motor of capacity 2 HP, for breakeven? MARR = 10% Motor A Motor B Purchase price 350000 500000 | Efficiency 15% 90% Life years 5 7 | Maintenance cost/year {25000 15000 | [Tax and insurance/year | (2018 Fall Solution: Motor A Assume electricity cost = Rs. 10 per kwh Capital recovery (CR) = 350000(A/P, 10%, 5) [eZE| # Engineering Economics= 350000 ] (1+i)’=1 5 = 3s0000[ AG 00 (1+. =1 =Rs. 92329.12 OP 1 TP or, p= 2k 7 Operating cost = Input * rate x operation hour a OF rate xx n OMG 95 9.89x Total annual cost = 92329.12 + 25000 + 5000 + 19.89x = 122329.12 + 19.89K sesnnn(1) Motor B CR= 5,00,000(A/P, 10%, 5) = 5,00,000 a) (+i*=1 aS 6.1(1 + 0.1)" = 5,00,000 eo] =Rs. 1,02,702.75 2x 0.746 0.9 = 16.58x Total annual cost 115000 + 10500 + 102702.7 + 16.58x. = 128202.7 + 16.58x .... (2) Operating cost = x 10*xx Now, . At breakeven point, 122329, 12 + 19.89x = 128202.7 + 16.58x “. X= 1774.51 hours = 1775 hours | Risk Analysis @ [EZ]i 1775 +. Per day, it should be operated ="3¢5" = 4.86 hours at Full load 14. Following information has been obtained regarding two motors. Motor Ae B Size 100HP_| 120 HP Cost (Rs.) 1,30,000_| 1,56,000 /Life in year ‘ 20 20 Salvage value (Rs.) 0 0 Efficiency 89.50% 93% Annual maintenance cost (Rs.) 8,000 250 [Electricity cost (Rs.) 6/kwhr 6/kwhr Annual tax and insurance = 2% of investment for both motors. i, At what operating hour are they equivalent. ii. If the motor have to be operated 55 hrs a year, which on should be selected? Take MARR = 10% per year. Solution: Motor A Capital recovery. (CR) = 1,30,000(A/P, 10%, 20) = 1,30,000 (| = 1,30,000 (ae hy = 15269.75 érisines POM Gs = 500.11x Total annual cost = 15269.75 + 8000 + (0.02 x 1,30,000) + 500.11x = 25869.75 + [Link] oescn(1) ‘ Engineering Economics15. Motor B Capital recovery = 1,56,000 (A/P, 10%, 20) x = 1,56,000 (oe = Rs, 18323.70 120 x 0.746 , bx 0.93 = 577.54x, Total annual cost = 18323.70 + 250 + (0.02 x 1,56,000) +577.54x, = 21693.7 + 577.54x ‘Now, equating equation (i) and (2) 25869.75 + 500.11x = 21693:7 +577.54x -. x = 53,93 years ~ 54 hours per year Operating cost = (2) Now, Total annual cost for motor A = 25869.75 + 500.11 = 55 =Rs, 53375.8 Total annual cost for motor B = 21693.7 + 577.54 x 55 = Rs. 53458.17 .... Since, the total annual cost of motor A is less than B. So, motor A is selected. From the following information, find how many hours/year would be the motors have to be operated at full load for annual cost to be equal? MARR = 15% per year. Motor A B Purchase cost Rs. 1,25,000 Rs. 1,60,000 (Efficiency 74% 92% Life 10 years 10 years Maintenance cost _| Rs. 5000/year Rs. 2500/year Annual tax and insurance = 1.5% investment for both motors. Electricity cost = Rs. 5/kwhr Power of both motors = 100 HP Risk Analysis #Solution: Motor A Capital recovery (CR) = 1,25,000(A/P, 15%, 10) uy | =125 00/7 (1+ 0.15)" =1.25 000s ] = 24906.5078 Operating cost = 100078 «5x x =504,05x Total annual cost = 24906.50 + 5000 + (1.5% of 1,25,000) + 504.05x = 31,781.50 + 504.05x ..sseeee(1) Motor B Capital recovery (CR) = 1,60,000(A/P,15%,10) .15(1 + 0.15)" = 1,60,000 LISP T "| = 31880.33 5 100 x 0.746 Operating cost=""" 99 * 5xx = 405.4x Total annual cost = 31880.33 + 2500 + (1.5% of 1,60,000) + 405.4x, = 36,780.33 + 405.4x.. so) Equating equation (1) and (2) we get, 31,781.50 + 504.05x = 36,780.33 + 405.4x ©. x= 50.707 per year 16. What do you mean by project risk? Explain briefly about the methods of project risk management. (2017 Fail) ‘Solution: An uncertain event or. condition that if it occurs has a positive or negative effect on projects objectives is called project risk. + Engineering EconomicsMethods of project risk management a, Identify the risks: It is the 1“ step and most important step. It involves an exchange of options. b, Analyze the risks: The analysis of identified risk is lengthy process, but it forms the foundation of all ensuring the risk management. c. Prioritize risks: This is the process where a risk management has to decide which risks he will take action against and those resources available to the project. d. Create action plans: Action plans begin by preventing risks or reducing the impact of identifiable risks. e. Risk transfer: Insurance coverage is the classic version of risk transfer. f. Monitor progress: The final step is a continuous monitoring of projects to identify any changes in risks. 17. | Write short notes on: Sources of project risk. _ [2018 Spring] Solution: See the definition part 6.1. 18. Write short notes on: Breakeven analysis. [2014 Fall, 2013 Fall] Solution: i The point at which equivalent worth of cash outflows is equal to the equivalent worth of cash inflows is called breakeven point and its analysis is called breakeven analysis, Advantages: a. Simple to conduct and understand, b.. Shows profit and loss at different level of output. Disadvantages: a. No semi-variable costs. b. Assume that all output is sold at given price. c. Assume production and sales are the same. Factor affecting breakeven analysis: a. Employing extra sales staff. b. Price increases. c, Recession cuts demand, d. Price war forces price cut. rida SE a19. Write short notes on: Sensitivity analysis. Solution: Sensitivity analysis revels how much the new (net present worth) of a project will change in response to a given change in one input variable or parameter. Advantages: a. It completes the decision maker to identify the variable which affects the cash flow forecasts. b. Ithelps to expose inappropriate forecasts. Disadvantages: a. It does not provide clear cut results, b. It fails to focus on the relationship between underlying variables. 20. Perform sensitivity analysis of the following project over | the range of +30% in i. Initial investment ii, Annual revenue iii, Useful life iv. Salvage value {Initial investment (Rs,) 114,500 |Annual revenue (Rs.) 4,000 Salvage value (Rs.) 10,000 [Useful life (years) 6 IMARR 20% [2023 Fall] ‘Solution: Initial investment, I= Rs. 14,500 Annual revenues, R = Rs. 4,000 * MARR = 20% Usefill life = 6 years Salvage value, S = 10,000 , PW(20%)= -14,500+4,000(P/A,20%,6)+10,000(P/F,20%,6) =—14,500 + 4,000 x 3,3255 + 10,000 x 0.3349 =Rs, 2151 i, When initial investment varies +30%. Atl=-30% # | IEEBN + engineering Economics* PW =-14,500(1-0.3)+4,000 x 3.3255 + 10,000 x 0.3349 =Rs. 6501 : Atl =+30% PW =-14,500(1+0.3)+4,000 x 3.3255 + 10000 x 0.3349 =Rs.-2199 ii, When annual revenue varies +30% At AR=-30% PW =-14,500 + 4,000(1-0.3) x 3.3255 + 10,000*0.3349 =Rs. -1839.6 At AR=+30% PW =-14,500 + 4,000(1+0.3) x 3.3255,+ 10,000x0.3349 =Rs. 6141.6 iii, When useful life varies +30% AtN=-30% [Note: 6 - 0.3 x 6=4.2 years] PW= -14,500+4,000(P/A,20%,4.2)+10000(P/A,20%,4.2) +iN— =-14,500 + 400 | + 10000(1 + iy <2 =-14,500+4,00q ne 2 +10000(1 + 0.2)? 0.2(1 + 0.2) =Rs. 850.15 - AtN=+30% [Note: 6 + 0.3 x 6 =7.8 years] 1274 PW =- 14,500 + 4000] | x + 10000 x 1.2°7* = Rs. 3087.95 Sensitivity table PW(20%) Parameter -30 0 +30 I 6501 2151 2199 AR —1839.6 2151 6141.6 Ss 850.5 2151 3087.95 Risk Analysis © (EES)21. Perform sensitivity analysis using PW method over #4 range of (tor-) 20% in a. Initial investment b. Net annual revenue c. Salvage value Initial investment = Rs. 52,00,000 ‘Annual revenues = Rs, 50,000 Annual expenses = Rs. 5,000 Salvage value = Rs. 25,000 Useful life = 10 years MARR = 12% per year {2026 Spring (New) Solution: Initial investment, I = Rs. 2,00,000 Annual revenues, R = Rs. 50,000 ‘Annual expenses, E = Rs. 5,000 MARR = 12% per year Useful life = 10 year Salvage value, S = Rs. 25,000 We have, PW (12%) =-I+(R-E)(PIA, i%, N) + S(P/F, i%, N) =-200000+(50000-5000)(P/A,12%,10)+25,000(P/F, 12%,10) =~2,00,000 + 45,000 x 5.6502 + 25000 x 0.3220 = Rs. 62,309 a. When initial invest (1) varies 20% AtI=-20% PW = ~2,00,000(1 - 0.2) + 45,000(P/A, 12%, 10) + 25,000 (PIF, 12%, 10) =~2,00,000 x 0.8 + 45,000 x 56502 + 25,000 x 0.3220 =Rs. 1,02,309 AtI=20% + Engineering EconomicsPW = -2,00,000(1 + 0.2) + 45,000 (PIA, 12%, 10) + 25,000 (PIA, 12%, 10) = -2,00,000 x 1.2 + 45,000 x 5.6502 + 25,000 x 0.3220 = Rs, 22309 b. When net annual revenue varies +20% At AR=+20% PW =+2,00,000 + 45,000 (1+0.2) x (PIA, 12%, 10) + 25,000 (PIF, 12%, 10) = -2,00,000 + 45,000 x 1.2 x 5.6502 + 25,000 x 0.3220 =Rs. 1,13,160.8 AtAR=~-20% PW = -2,00,000 + 45,000 (1 — 0.2) (P/A, 12%, 10) + 25,000 (PIF, 12%, 10) =~2,00,000 + 45,000 x 0.8 x 5.6502 + 25000 x 0.3220 = Rs. 11,457.2 c. When salvage value varies +20%, - At =-20% PW = ~2,00,000 + 45,000 x (P/A, 12, 10) + 25,000 (1 - 0.2) x (PIF, 12%, 10) = ~2,00,000 + 45,000 x 5.6502 + 25,000 x 0.8 x 0.3220 = 60699 AtS=+20% PW = ~2,00,000+45,000(P/A,12%,10)+25,000 x 1.2 x 0,320 = ~2,00,000 + 45,000 x 5.6502 + 25000 x 1.2 x 0.3220 = 63919 Risk Analysis # EmSensitivity table:. Parameter Ener -20 0 +20 | I 1,02,309 | 62,309 22309__—| AR 11,457.2 62,309 1,13,160.8 s 60,699 62,309 63,919 22. Write short notes on: Risk analysis. [2024 Spring (New!) Solution: See the definition part 6.1. 23. If Sony Company wants to produce branded Laptop computers with increasing market demand. The company is estimated following figures. Fixed cost = Rs. 20,00,000 Total cost = Rs. 40,00,000 Total sales = Rs. 30,00,000 Sales quantity = 50 units i. Find break-even unit of production. ii, What should be the output if company desires profit of Rs. 5,00,000. i (2024 Fall] Solution: Given, Fixed cost (FC) = Rs. 20,00,000 Total cost (TC) = Rs, 40,00,000 Total sales (TR) = Rs. 30,00,000 Sales quantity = 50 units Desired profit = Rs. 5,00,000 Selling price per unit (SP) = Hout saes 3000000 50 =Rs. 60,000 Engineering EconomicsTotal variable cost (VC) = Total cost - Fixed cost = 40,00,000 - 20,00,000 = Rs. 20,00,000 Total VC Units _ 2000000 50 =Rs. 40,000 Contribution per unit = Selling price - Variable cost = 60,000 - 40,000 =Rs. 20,000 i. Break-even points: Variable cost per unit (VC/unit) = Fixed cost Contribution per unit 2000000 "20000 = 100 units ii, Output for desired profit of Rs. 5,00,000, Fixed cost + Desired cost Contribution per unit _ 2000000 + 500000 =~ 20000 = 125 units Break-even units = Required units = Risk Analysis + [