PROBLEMS RELATING TO ENGINEERING ECONOMY AND FINANCE

Group Basic Theory of Engineering economy and Finance

1. Meaning of Engineering economy
Engineering economy provides a systematic frame work for evaluating the economic aspect
of competing design solution. A design or a model will be selected by an engineer with aspect of
its economic impact. Prevalently, some indicators are using by engineers for evaluating the
projects which are common in economics. Broadly speaking, engineers use knowledge to find
new ways of doing things economically. Obviously, every problem has multiple solutions; but
the main issue is how one selects the design with most favourable economic result? The answer
to the question can also be put forwards in two words Engineering Economy.


2. The use of Engineering economy in industry
Since engineering is an important part of the manufacturing sector of the economy,
engineering industrial economics is an important part of industrial or business economics. Major
topics in engineering industrial economics are:
the economics of the management, operation, and growth and profitability of engineering
firms;
macro-level engineering economic trends and issues;
engineering product markets and demand influences; and
the development, marketing, and financing of new engineering technologies and products.
Benefit Cost Analysis


3. Demonstrate, how Engineering economy could bring benefits to society?
Although economics will be the sole criterion for selecting the best alternatives, real-world
decisions usually include many other factors in the decision making process such as, in
determining whether to build a nuclear-powered, gas-fired, or coal-fired power plant, factors
such as safety, air pollution, public acceptance, water demand, waste disposal, global warming,
and many others would be considered in identifying the best alternative. The inclusion of other
factors (besides economics) in the decision-making process is called multiple attribute analysis.
In performance of engineering economy, engineers must ask themselves if a particular
project will offer some net benefit to the people who will be affected by the project, after
considering its inherent benefits, plus any negative side-effects (externalities), plus the cost of
consuming natural resources, both in the price that must be paid for them and the realization that
once they are used for that project, they will no longer be available for any other project(s).
Simply put, engineers must decide if the benefits of a project exceed its costs, and must
make this comparison in a unified framework. The framework within which to make this
comparison is the field of engineering economics, which strives to answer exactly these
questions, and perhaps more. The Accreditation Board for Engineering and Technology (ABET)
states that engineering "is the profession in which a knowledge of the mathematical and natural
sciences gained by study, experience, and practice is applied with judgment to develop ways to
utilize, economically, the materials and forces of nature for the benefit of mankind"
Performance of engineering economy, deals with the behaviour of people, and as such,
economic concepts are usually qualitative in nature, and not universal in application.


4. How Finance is linked with engineering management?
Finance is a field closely related to accounting that deals with the allocation of assets
and liabilities over time under conditions of certainty and uncertainty. Finance also applies and
uses the theories of economics at some level. Finance can also be defined as the science of
money management especially in engineering management. A key point in finance is the time
value of money, which states that purchasing power of one unit of currency can vary over time.
Finance aims to price assets based on their risk level and their expected rate of return. Hence,
finance is very important in engineering management.


5. Demonstrate, how Finance could bring benefits to society?

Financial knowledge helps society to make decisions
1) Cash raised from investors by selling financial assets
2) Cash invested in real assets
3) Cash generated by operations
4) Cash reinvested
5) Cash returned to investors (debt payments, dividends)
Finance to be more precise is concerned with the management of,
a) Owned funds (promoter contribution)
b) Raised funds (equity share, preference share)
c) Borrowed funds (loans, debentures, overdrafts )
At the same time, Finance also encompasses wider perspective of managing the business
generated assets and other valuables more efficiently.


Group - Costing
6. Demonstrate concept of cost in the aspect of engineering economy.
Raw material Q (out amount)

Labour Machine Management

Manufacturing process
7. Develop a product cost model

Q=AL

M
n


Where:
=contribution of labour
=contribution of machine
=contribution management

Where:

marginal output respect to L, M, M

n




.

8. With the aid of mathematical model and graph; define Variable cost, marginal cost, and
fixed cost.

Marginal
Q
Machine
Variable costs are costs that change in proportion to the good or service that a business
produces. Variable costs are also the sum of marginal costs over all units produced. They can
also be considered normal costs. Fixed costs and variable costs make up the two components
of total cost. Direct costs, however, are costs that can easily be associated with a particular cost
object. However, not all variable costs are direct costs. For example, variable manufacturing
overhead costs are variable costs that are indirect costs, not direct costs. Variable costs are
sometimes called unit-level costs as they vary with the number of units produced.


9. Develop model for Breakeven of product sell
Break-even is the point of zero loss or profit. At break-even point, the revenues of the
business are equal its total costs and its contribution margin equals its total fixed costs. Break-
even point (BEP) can be calculated by equation method, contribution method or graphical
method. The equation method is based on the cost-volume-profit (CVP) formula:
px = vx + FC + Profit
Where,
p is the price per unit,
x is the number of units,
v is variable cost per unit and
FC is total fixed cost.

Calculation BEP in Sales Units
At break-even point the profit is zero therefore the CVP formula is simplified to:
px = vx + FC
Solving the above equation for x which equals break-even point in sales units, we get:
Break-even Sales Units = x = FC
p v
BEP in Sales Dollars
Break-even point in number of sales dollars is calculated using the following formula:
Break-even Sales Dollars = Price per Unit Break-even Sales Units


10. At least solve three problems of Breakeven of sell
Problem 1
A company is considering publishing a limited edition book bound in special leather. It
has in stock the leather bought some years ago for $1,000. To buy an equivalent quantity now
would cost $2,000. The company has no plans to use the leather for other purposes, although it
has considered the possibilities:
a) of using it to cover desk furnishings, in replacement for other material which could cost $900
b) of selling it if a buyer could be found (the proceeds are unlikely to exceed $800).
In calculating the likely profit from the proposed book before deciding to go ahead with
the project, the leather would not be costed at $1,000. The cost was incurred in the past for some
reason which is no longer relevant. The leather exists and could be used on the book without
incurring any specific cost in doing so. In using the leather on the book, however, the company
will lose the opportunities of either disposing of it for $800 or of using it to save an outlay of
$900 on desk furnishings.
The better of these alternatives, from the point of view of benefiting from the leather, is
the latter. "Lost opportunity" cost of $900 will therefore be included in the cost of the book for
decision making purposes.
The relevant costs for decision purposes will be the sum of:
i) 'Avoidable outlay costs', i.e. those costs which will be incurred only if the book project is
approved, and will be avoided if it is not
ii) The opportunity cost of the leather (not represented by any outlay cost in connection to the
project).
This total is a true representation of 'economic cost'.

Problem 2
Seeing a need for childcare in her community, Sue decided to launch her own day care service.
Her service needed to be affordable, so she decided to watch each child for $12 a day. After
doing her homework, Sue came up with the following financial information:
The month of June has 20 workdays, Monday through Friday for four weeks. How many
children will Sue need to take care of just to break-even in her new business?
Break-evens are calculated using the following formula:
Break-even = Operating Expenses Gross Margin per unit
Break-even = Operating Expenses ($12.00 - $4.00)
Break-even = $600 $8.00
Break-even = 75 units (children) in June
Since there are 20 days in June, Sue must watch 75 20 = 3.75 kids! Or four children every day.
Right from the start, Sue knows that she must take care of at least four kids every day to start to
make a profit.


Problem 3
Calculate break-even point in sales units and sales dollars from following information:
Price per Unit $15
Variable Cost per Unit $7
Total Fixed Cost $9,000
Solution
We have,
p = $15
v = $7, and
FC = $9,000
Substituting the known values into the formula for breakeven point in sales units, we get:
Breakeven Point in Sales Units (x)
= 9,000 (15 7)
= 9,000 8
= 1,125 units
Break-even Point in Sales Dollars = $15 1,125 = $16,875







Group - Money management (Finance)
11. Demonstrate your concept on time value of money.
Time Value of Money (TVM) is an important concept in financial management. It can be
used to compare investment alternatives and to solve problems involving loans, mortgages,
leases, savings, and annuities.
TVM is based on the concept that a dollar that we have today is worth more than the
promise or expectation that we will receive a dollar in the future. Money that we hold today is
worth more because we can invest it and earn interest. After all, we should receive some
compensation for foregoing spending. For instance, we can invest our dollar for one year at a 6%
annual interest rate and accumulate $1.06 at the end of the year. We can say that the future
value of the dollar is $1.06 given a 6% interest rate and a one-year period. It follows that
the present value of the $1.06 we expect to receive in one year is only $1.
A key concept of TVM is that a single sum of money or a series of equal, evenly-spaced
payments or receipts promised in the future can be converted to an equivalent value
today. Conversely, we can determine the value to which a single sum or a series of future
payments will grow to at some future date. We can calculate the fifth value if we are given any
four of: Interest Rate, Number of Periods, Payments, Present Value, and Future Value


12. At least solve three problems relating to time value of money
Problem 1
Jim makes a deposit of $12,000 in a bank account. The deposit is to earn interest annually at the
rate of 9 percent for seven years.
a) How much will Jim have on deposit at the end of seven years?
P/Y = 1, N = 7, I = 9, PV = 12,000, PMT = 0 FV = $21,936.47
b) Assuming the deposit earned a 9 percent rate of interest compounded quarterly, how much
would he have at the end of seven years?
P/Y = 4, N = 7 4 = 28 FV = $22,374.54


Problem 2
John is considering the purchase of a lot. He can buy the lot today and expects the price to rise to
$15,000 at the end of 10 years. He believes that he should earn an investment yield of 10 percent
annually on this investment. The asking price for the lot is $7,000. Should he buy it? What is the
annual yield (internal rate of return) of the investment if John purchases the property for $7,000
and is able to sell it 10 years later for $15,000?
P/Y = 1, N = 10, I = 10, PMT = 0, FV = 15,000 PV = $5,783.15. Because the present value
of this investment is less than the $7,000 asking price for the lot, John should not buy it.
To solve for the internal rate of return enter PV = 7,000 and compute I = 7.92%.

Problem 3
An investor can make an investment in a real estate development and receive an expected cash
return of $45,000 after six years. Based on a careful study of other investment alternatives, she
believes that an 18 percent annual return compounded quarterly is a reasonable return to earn on
this investment. How much should she pay for it today?
P/Y = 4, N = 6 4 = 24, I = 18, PMT = 0, FV = 45,000 PV = $15,646.66.




13. Define NPV with cash flow diagram
The Net Present Value (NPV) technique applies this idea to the analysis of projects. In the
Net Present Value technique, we calculate the present value of each of a projects cash flows and
add them together. The result is the Net Present Value of the project, usually referred to the
NPV. In the other hand, NPV also can be defined as the difference between the present value of
cash inflows and the present value of cash outflows.
The word net implies an offsetting of pluses against minuses which reflects the fact that
some flows are positive (inflows) and others are negative (outflows). Decision about which
projects to undertake are based on project NPVs. Besides, Net Present Value is used to calculate
the total of all cash flows (in and out) that can be directly linked to your project. If the answer is
positive, its good and we can accept the projects. Otherwise, you might reconsider the
investment.
The present value of a stream of payments

can be calculated with the discounting factor
NPW = F
0
/ (1 + i)
0
+ F
1
/ (1 + i)
1
+ F
2
/(1 + i)
2
+ .... + F
n
/(1 + i)
n

where
NPW = present worth or value
F = future cash flow
i = discount rate
(1 + i)
n
is known as the "compound amount factor".


14. What is the use of NPV in industry, explain with one example
A manager can use NPV to determine the worthiness of one project at a time. However, it
can be used to evaluate several projects at a time. A manager evaluating more than one potential
investment at a particular point in time can compare the respective projected returns to find the
most attractive project. It is important that middle level managers are able to evaluate/appraise a
proposed project(s) or investment mathematically in addition to the use of ones instinct. NPV
can be either positive, negative or zero. A positive NPV indicates that the project should be
profitable, assuming that the estimated cash flows are reasonably accurate. While a negative
NPV, of course, indicates that the project will probably be unprofitable and therefore should be
rejected. However, a project with zero net present value (NPV) may be accepted. A zero net
present value (NPV) implies that project generates cash flow at a rate just equal to the
opportunity cost of capital.
Therefore, the net present value (NPV) acceptance rules are:
Accept the project net present value (NPV) is positive
Reject the project net present value (NPV) is negative
May accept the project when net present (NPV) is zero
Very importantly, NPV enables a manager consider the time value of money it will invest.
When the time value of money concept is incorporated in the calculation of NPV, the value of a
projects future net cash receipts in todays money can be determined by using a selected Cost
of Capital (COC). COC refers to the cost of a company's funds (both debt and equity), or, from
an investor's point of view "the shareholder's required return on a portfolio company's existing
securities". It is used to evaluate new projects of a company as it is the minimum return that
investors expect for providing capital to the company, thus setting a benchmark that a new
project has to meet. Cost of capital varies within industries. For instance the COC used by a
manufacturing company will be different from the COC used by a financial firm because their
exposure to risk differs. The COC used globally or locally within the financial sectors is likely to
be higher (indicating more exposure to risk) than that used within the manufacturing industry.

Example
A financial analyst at a leading real estate firm is thinking about recommending that Kaufman &
Broad invest in a piece of land that costs RM 85,000. She is certain that next year the land will
be worth RM 91,000, a sure RM 6,000 gain. Given that the guaranteed interest rate in the bank is
10%, should Kaufman & Broad undertake the investment in land?
RM 91,000

0 1
RM 85,000
Solution :
Where :

Decision:
Do not buy the land.
Purchase of the land should not be recommended.
If present value of cash inflows is less than the present value of the cash outflows, the net present
value is said to be positive and the investment proposal is considered to be rejected.

15. At least solve three problems relating to NPV
Problem 1
The present worth by investing 1000 today receiving 250 every year in 5 years at an interest or
discount rate of 10%, can be calculated
NPW = - 1000

/ (1 + 0.1)
0
+ 250

/ (1 + 0.1)
1
+ 250 /(1 + 0.1)
2


+ 250 /(1 + 0.1)
3
+ 250 /(1 + 0.1)
4
+ 250 /(1 + 0.1)
5

= -52.3
PV is negative - and the investment should be avoided.






Problem 2
Invest $2,000 now, receive 3 yearly payments of $100 each, plus $2,500 in the 3rd year. Use
10% Interest Rate.
$100 & $2500
$100
$100
0 1 2 3

- $2,000


Solution :
Where :

Decision:
It is good investment.
The company is gaining profit and the company will sustain.
If present value of cash inflows is greater than the present value of the cash outflows, the net
present value is said to be positive and the investment proposal is considered to be
acceptable.


Problem 3
We are evaluating a series of $1000 investment in year 1. With discount rate 10%. You expect
to receive $110 in year 2. You expect to receive $1,200 in year 3. The NPV of the investment
would be:-
$110 $1200

0 1 2

-$1000

Answer
Where :

Decision:
When NPV is greater than zero it means that the discounted value of future cash flows is
greater than your initial investment and you would be getting an even higher return than you
desire.
If present value of cash inflows is greater than the present value of the cash outflows, the net
present value is said to be positive and the investment proposal is considered to be acceptable.




16. What is the use of depreciation model in engineering management
Depreciation is the reduction in value of an asset. In engineering management, the method
used to depreciate an asset is a way to account for the decreasing value of the asset to the owner
and to represent the diminishing value of the capital funds invested in it.


17. At least solve three problems relating to depreciation
Problem 1
An asset has a useful life of 3 years.
Cost of the asset is $2,000.
Residual Value is $500.

Annual Depreciation cost will be




Problem 2
Suppose that you purchase a car for $1000. The scrap value of the car after its useful life is $200,
and the useful life of the car is 4 years. In order to calculate the depreciation of the car for the
year 1, you will need to perform the following computation:
Depreciation =

Since this is straight-line depreciation, you need to subtract this value from the balance sheet for
the next 4 years in order to calculate the net book value of the asset.

Problem 3
You buy a new computer for your business costing approximately $5,000. You expect a salvage
value of $200 selling parts when you dispose of it. Accounting rules allow a maximum useful
life of five years for computers. In the past, your business has upgraded its hardware every three
years, so you think this is a more realistic estimate of useful life, since you are apt to dispose of
the computer at that time. Using that information, you would plug it into the formula:
($5,000 purchase price - $200 approximate salvage value) 3 years estimated useful life
The answer, $1,600, is the depreciation charges your business would take annually if you were
using the straight line method.


Group-Production Performance
18. State your concept of production performance
"Production performance" refers to performance relative to measures and indicators of
product and service characteristics important to customers. Examples include product reliability,
on-time delivery, customer-experienced defect levels, and service response time. For non-profit
organizations, "product performance" examples might include program and project performance
in the areas of rapid response to emergencies, at-home services, or multilingual services.
A production performance report is made up of a set of 1 or more production responses. The
production performance also contains the information that defines the context of the report, such
as start time, end time, location, and published date.




19. With mathematical Model define (relating to mechanical and manufacturing Engineering)
Physical efficiency, Technical efficiency and Economic efficiency.
Physical efficiency
Physical efficiency is related to the physical amount of all factors used in the process of
producing some product. However it is not the same as the economic efficiency which related to
the value of the product.
Physical efficiency takes the form:
System output(s)
Physical (efficiency) = ---------------------------------
System input(s)

Technologically efficient
There are two ways for a production process to be technologically efficient. One, a production
process is technologically efficient if it yields the highest output possible for a given level of
input. For example, if you build night stands and you get the greatest number of night stands as is
possible from 200 board feet of mahogany then you are efficient in the production of night
stands. Two, a production process is technologically efficient if it uses the minimum level of
input to produce a given level of output. For example, if you build 10 night stands with the
minimum amount of wood possible then you are technologically efficient in the production of
night stands.
Technological efficiency is measured by the ratio of units of output to units of input:

Units of output
Units of input

Referring to this formula and the above discussion, technological efficiency increases whenever
the units of output increase or the units of input decrease. A production process is
technologically efficient whenever this measurement is as large as possible.

Economic efficiency
Economic efficiency is related to the value of all inputs used in producing a given
amount. The production of a given output is economically efficient if there is no other ways of
producing the output that use smaller total value of inputs. The economic efficiency can be
calculated as followed:

System worth(s)
Economic efficiency = ------------------------------ x 100%
System cost(s)

The economic efficiency also called benefit-cost ratio. If the efficiency obtain is higher
than 100%, the product make a lots of profits. In contrast to physical efficiency, economic
efficiency can exceed unity, and in fact should, if a project is to be deemed economically
feasible. The most difficult part of determining economic efficiency is accounting for all the
factors which might be considered benefits or costs of a particular project, and converting these
benefits or costs into a monetary equivalent.


20. At least solve three problems relating to Physical efficiency, Technical efficiency and
Economic efficiency.
Physical efficiency
Problem 1
In the power plant system that converting fuel into electrical energy. Assume that the fuel input
is 100 litres, after the conversion process, the output electrical energy produce is 36 kilo-Watt.
Therefore, the overall conversion physical efficiency is:
36
Physical efficiency = ------------------- x 100%
100
= 36%
The overall conversion physical efficiency is 36%. The remaining 74% of the fuel is being
converted into other source of energy such as heat energy that is being removed during the
process.











Problem 2
Consider in the production of the car in a manufacturing company. Assume the amount of the
physical material use is 100. Then the output material of the car is 32. Hence the physical
efficiency is:

32
Physical efficiency = ------------------- x 100%
100
= 32%
The remaining 68% is all the waste material produce during the production of the car.


Problem 3

Consider the production of the chair that made by wood. Assume that the amount of wood use is
100. After all the cutting and binding process, the total waste of the wood is 76. Hence the
physical efficiency of the process is as followed:

(100-76)
Physical efficiency = ----------------------- x 100%
100
= 24%
Therefore, the physical efficiency of the product is 24%. The remaining waste can be recycling
to make other product so that the amount of wasted material can be reduced.

Economic efficiency
Problem 1

Consider in the power plant that converting the fuel into electrical energy. Consider the cost of
the fuel input is $5.00 per million fuels. After the conversion process occurred, the electrical
power is sells for $0.03 per kWh which mean $8.79 per million. Hence the economic efficiency
is as followed:

$8.79 per million
Economic efficiency = ------------------------------ x 100%
$5.00 per million
= 176%

This mean that the company obtain extra 76% profits in term of economically.

Problem 2
Consider a manufacturing company that manufacture the motorcycle. Assume the amount of cost
used to manufacture a fully furnished motorcycle is RM1800 per unit. The company can produce
5 motorcycles per day. The company sell the motorcycle to the customer RM3500 per unit.
Calculate the economic efficiency of the product in one day.

In one day, total cost input used is RM1800 x 5 = RM9000
The total cost selling is RM3500 x 5 = RM17500
Therefore the economic efficiency is:

RM 17500
Economic efficiency = ------------------------------ x 100%
RM 9000
= 194%

The company obtain extra 94% profit which is economically feasible for the company.

Problem 3
Consider a firm that is currently using 100 units of labour and 50 units of capital to produce a
certain level of output. If the firm could maintain its current output level by using only 90 units
of labour without using more capital, then the economic efficiency is:

90
Economic efficiency = ------------------- x 100%
100
= 90%
In a firm, the 90% also is being technically inefficient in its current methods because it is
wasting 10 units of labour. Thus a good physical efficiency is about getting the most output
from any given set of inputs; or, equivalently, about producing a given level of output using the
least amount of physical inputs. There are many method can be used in the firm so that to
obtained a good economic efficiency.


21. What will happen if:
Physical efficiency and Technical efficiency <1,
=
If physical efficiency and technical efficiency is <1, than the system, manufacturing or
production is not sustain sustainability. Hence, the process needs to stop immediately before
company lost money. When physical efficiency and technical efficiency is =1, the system,
manufacturing or production is constant sustainability. So, the company can continue with the
manufacturing.

22. What will happen if:
Economic efficiency <1
=
>
When the economic efficiency is <1, the production is not sustain, hence the company should
stop the manufacturing process stop immediately before it lost money.
When the economic efficiency is =1, the production is constant sustain, hence the company can
proceed the manufacturing process.
When the economic efficiency is >1, the production is significantly sustain, hence, the company
should proceed the manufacturing process to gain profit.

23. Define elasticity of output with respect to various inputs.
In economics, output elasticity is the percentage change of output (GDP or production of
a single firm) divided by the percentage change of an input. It is sometimes called partial output
elasticity to clarify that it refers to the change of only one input.
As with every elasticity, this measure is defined locally, i.e. defined at a point. If the
production function contains only one input, then the output elasticity is also an indicator of the
degree of returns to scale. If the coefficient of output elasticity is greater than 1, then production
is experiencing increasing returns to scale. If the coefficient is less than 1, then production is
experiencing decreasing returns to scale. If the coefficient is 1, then production is experiencing
constant returns to scale. Note that returns to scale may change as the level of production
changes.
Output elasticity is defined as the percentage change in output per one percent change in
all the inputs. The coefficient of output elasticity can be used to estimate returns to scale.
The mathematical formula is where x represents the inputs and Q, the output.





24. At least solve three problems relating to elasticity.
Problem 1
This is a measure of the responsiveness of demand to changes in price. Price elasticity of
demand may be calculated using the point method as follows:



For example, assume the price of particular new car model rose from $20,000 to $25,000,
resulting in demand falling from 10,000 to 5,000 new car sales.
The calculation would be as follows;




Problem 2
Assume that when gas prices increase by 50%, gas purchases fall by 25%. Using the formula
above, we can calculate that the price elasticity of gasoline is:
Price Elasticity = (-25%) / (50%) = -0.50
Thus, we can say that for every percentage point that gas prices increase, the quantity of gas
purchased decreases by half a percentage point.





Problem 3
When the price of CD increased from $20 to $22, the quantity of CDs demanded decreased from
100 to 87. What is the price elasticity of demand for CDs? Is it demand elastic or inelastic?
Price Elasticity of demand = % change in Q.D. / % change in Price
Calculating a %
The price increases from $20 to $22. Therefore % change = 2 / 20 = 0.1
0.1 = 10% (0.1 *100)
Quantity fell by 13 / 100 = 0.13 (13%)
Therefore elasticity = 13 / 10
Therefore elasticity = -1.3
Therefore Demand is elastic. Elastic demand occurs when % change in Quantity is
greater than % change in price; when elasticity >1


25. Define return to scale of production
Return to scale is refers to how much additional output can be obtained when we change all
inputs proportionately in production.

26. What will happen if: return to scale <1
=
>
When return to scale =1, then the production function has constant returns to scale. More
precisely, a production function has constant returns to scale if, for any > 1,
When return to scale <1, then the production function has decreasing returns to scale. More
precisely, a production function has decreasing returns to scale if, for any > 1,
When return to scale >1, then the production function has increasing returns to scale. More
precisely, a production function has increasing returns to scale if, for any > 1,



27. Develop production inputs-output model



28. At least solve three problems relating to inputs-output
Problem 1
A 500 MW (net) generator is 35% efficient. It is being supplied with coal costing $1.70 per
MBtu and with heat content 9000 Btu per pound. What is the coal usage in lbs/hr? What is the
cost?


Problem 2
Labour (5000) Q (out amount)

K (50000) Machine(20000)

Manufacturing car

Hence, the output is 181 car.

Problem 3

output


i.)
Q
o
= 30L
o
0.6

= 30 (3000)
0.6

= 3659.2662 units
Q
1
= 30L
1
0.6

= 30(3400)
0.6

= 3944.6512 units
Q = Q
1
- Q
o

= 3944.6512 3659.2662
M K
L
1
= 3400
Manufacturing process
= 285.385 units
The total change in output due to changing in the labour forces in production is 285.385
units.
ii.)
% Q =

x 100%
= 7.8 %
% L =

x 100%
= 13.33 %
=



=

= 0.586
Thus, the elasticity of the output with respect to labour is 0.586.
iii.)
Comment:
1. Initially, output per labour was more than 1. However, after adding 400 labours, output
per labour becomes 0.5 units per labour.
2. It indicates 400 newly added labour is not fully utilized.
3. Labour is not fully utilized because there is excess labour.
4. Thus, we need to remove excess labour.

Group - Project Risk Analysis
29. State about the fundamental indicators of risk management.
Fundamental analysis of a business involves analyzing its financial statements and health,
its management and competitive advantages, and its competitors and markets. When applied
to futures and forex, it focuses on the overall state of the economy, and considers factors
including interest rates, production, earnings, employment, GDP, housing, manufacturing and
management. When analyzing a stock, futures contract, or currency using fundamental analysis
there are two basic approaches one can use; bottom up analysis and top down analysis. The term
is used to distinguish such analysis from other types of investment analysis, such as quantitative
analysis and technical analysis.
Fundamental analysis is performed on historical and present data, but with the goal of making
financial forecasts. There are several possible objectives:
to conduct a company stock valuation and predict its probable price evolution,
to make a projection on its business performance,
to evaluate its management and make internal business decisions,
to calculate its credit risk.

30. Demonstrate, how NPV, break even, expected value method and decision three methods
could be used to reduce project risk.
The cost concept of the project risk analysis can be demonstrated by decision tree where it
solving the problem with the best decision and finding expected value of all possible states of
nature.

How Can Risk Analysis Aid Project Management?
1. Provide better information to support decisions regarding project direction and the setting of
schedule and cost targets and contingencies.
2. Identify actions that can be taken to help improve technical, schedule and cost performance.
3. Address known causes of poor project performance.
4. Assist in monitoring the status of the program as it proceeds.