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1.
>The decision-making cycle in engineering economics involves systematic steps

to evaluate and select the best alternative among multiple options. It ensures
rational and economic decisions. The key steps are:
1. Problem Definition: Clearly define the problem or objective to address.

2. Objective Setting: Establish criteria or goals for evaluation (e.g., cost, time, ROI).
3. Alternatives Identification: List all feasible options or solutions.
4. Data Collection: Gather relevant data (e.g., costs, benefits, risks, timelines).
5. Economic Analysis: Use engineering economic methods (e.g., NPV, IRR, payback
period) to analyze alternatives.
6. Comparison of Alternatives: Rank options based on quantitative and qualitative factors.
7. Decision Making: Select the best alternative that meets objectives and constraints.
8. Implementation: Execute the chosen alternative.
9. Feedback and Evaluation: Monitor results, compare outcomes with expectations, and
make adjustments if needed.
This cycle ensures decisions are logical, data-driven, and aligned with economic principles.
2.>Type of costs? And their examples (fixed , variable, marginal, Life-Cycle Opportunity cost????????
Here are the types of costs in engineering economics, along with examples:
1. Fixed Costs:
o Costs that do not change with production or service levels.
o Examples: Rent for a factory, salaries of permanent staff, insurance premiums.
2. Variable Costs:
o Costs that vary with the level of production or activity.
o Examples: Raw material costs, electricity for production, wages for temporary
workers.
3. Marginal Costs:
o The additional cost incurred by producing one more unit of output.
o Example: If producing 100 units costs $1,000 and producing 101 units costs
$1,010, the marginal cost is $10.
4. Life-Cycle Costs:
o Total costs incurred over the entire lifecycle of a product, including acquisition,
operation, maintenance, and disposal.
o Example: For a car, costs include purchase price, fuel, maintenance, and resale or
recycling costs.
5. Opportunity Costs:
o The cost of forgoing the next best alternative when a decision is made.
o Example: Choosing to invest $10,000 in equipment instead of using it for
employee training results in the opportunity cost of not having trained staff.
Understanding these costs is essential for effective economic decision-making in engineering

projects.
2.> 3. Write notes on cost estimation mode???????????????????
=Cost Estimation Models (Short Notes)
1. Analogous Estimation:
o Based on past similar projects.
o Quick but less accurate.
2. Parametric Estimation:
o Uses mathematical relationships (e.g., cost per unit).
o Accurate if parameters are reliable.
3. Bottom-Up Estimation:
o Detailed estimation of individual components.
o Accurate but time-intensive.
4. Expert Judgment:
o Relies on expert opinions.
o Useful for limited data but subjective.
5. Three-Point Estimation:
o Averages optimistic, pessimistic, and most likely costs.
o Accounts for uncertainty.
6. Life-Cycle Cost Estimation:
o Considers all costs over a product’s life.
o Comprehensive but complex.
7. Probabilistic Estimation:
o Uses statistical methods for uncertainty.
o Quantifies risks and variability.
These models help choose suitable methods for cost planning and decision-making.
3.> What is time value of money ? give examples?

Time Value of Money (TVM)
The Time Value of Money (TVM) is the concept that money today is worth more than the same
amount in the future due to its earning potential. This principle is central to engineering
economics for evaluating investments and project feasibility.
Examples in Engineering Economics
1. Present Value (PV) Calculation:

o Determining the current worth of future cash flows.
oExample: Calculating the present value of $100,000 to be received in 5 years for a
construction project.
2. Future Value (FV) Estimation:
o Predicting how much an investment today will grow.
o Example: Estimating how a $50,000 equipment purchase will save costs over 10
years at a specific interest rate.
3. Net Present Value (NPV):
o Evaluating profitability of projects by comparing initial costs with discounted
future benefits.
o Example: Deciding whether to invest in renewable energy systems based on NPV
analysis.
4. Loan Repayments:
o Engineering firms using TVM to structure equipment or project financing.
o Example: Calculating monthly payments for a $1 million loan for machinery.
TVM ensures economic decisions account for the earning potential and cost of capital over time.
4.>Nominal Interest vs. Effective Interest

1. Nominal Interest Rate (i_nom):
o The stated annual interest rate without compounding.
o Example: 12% per year compounded monthly.
2. Effective Interest Rate (i_eff):
o The actual annual interest rate, considering compounding.
o Formula: ieff=(1+inomn)n−1i_{\text{eff}} = \left(1 + \frac{i_{\text{nom}}}{n}\
right)^n - 1ieff=(1+ninom)n−1 Where inomi_{\text{nom}}inom = nominal rate,
nnn = compounding periods per year.
Numerical Example:
 Given: Nominal Interest Rate = 12% per year, compounded monthly.

 Solution:
ieff=(1+0.1212)12−1=(1+0.01)12−1=1.1268−1=0.1268 or 12.68%.i_{\text{eff}} = \left(1

+ \frac{0.12}{12}\right)^{12} - 1 = (1 + 0.01)^{12} - 1 = 1.1268 - 1 = 0.1268 \, \text{or}
\, 12.68\%.ieff=(1+120.12)12−1=(1+0.01)12−1=1.1268−1=0.1268or12.68%.
 Result: The effective interest rate is 12.68% per year.
Importance in Engineering Economics:

Effective interest rates are crucial for comparing loans, investments, and project costs under
different compounding scenarios.
5.>Write short notes on Probability & Joint Probability.
Probability
 Definition: Measure of the likelihood that an event will occur, expressed between 0
(impossible) and 1 (certain).
 Formula: P(A)=Number of favorable outcomesTotal possible outcomesP(A) = \frac{\
text{Number of favorable outcomes}}{\text{Total possible
outcomes}}P(A)=Total possible outcomesNumber of favorable outcomes
 Example in Engineering Economics: Estimating the probability of project success
based on past data.
Joint Probability
 Definition: Probability of two or more events occurring simultaneously.

 Formula: P(A∩B)=P(A)⋅P(B)(if events are independent)P(A \cap B) = P(A) \cdot P(B) \
quad (\text{if events are independent})P(A∩B)=P(A)⋅P(B)(if events are independent)
 Example in Engineering Economics: Determining the probability of both equipment
failure and delayed maintenance impacting production.
6.>Break-Even Analysis
 Definition: A method to determine the point at which total revenue equals total costs (no
profit, no loss).
 Formula: Break-
Even Point (BEP)=Fixed CostsSelling Price per Unit−Variable Cost per Unit\text{Break-
Even Point (BEP)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} - \
text{Variable Cost per Unit}}Break-
Even Point (BEP)=Selling Price per Unit−Variable Cost per UnitFixed Costs

7.> Internal Rate of Return (IRR)
 Definition:
The Internal Rate of Return (IRR) is the discount rate at which the Net Present Value
(NPV) of a project or investment equals zero. It represents the project's expected rate of
return.
 Formula:
IRR is found by solving:
∑Cash Flows(1+IRR)t=Initial Investment\sum \frac{\text{Cash Flows}}{(1 + \

text{IRR})^t} = \text{Initial Investment}∑(1+IRR)tCash Flows=Initial Investment
7.> Net Present Value (NPV)
 Definition:
The Net Present Value (NPV) is the difference between the present value of cash
inflows and the present value of cash outflows over a project's life. It determines the
profitability of an investment.
 Formula:
NPV=∑Cash Inflows(1+r)t−Initial InvestmentNPV = \sum \frac{\text{Cash Inflows}}{(1

+ r)^t} - \text{Initial Investment}NPV=∑(1+r)tCash Inflows−Initial Investment
Where:
o rrr = Discount rate

o ttt = Time period
8.<> Definition:
Depreciation is the reduction in the value of an asset over time due to factors like wear and
tear, obsolescence, or age. In engineering economics, it represents the allocation of the cost
of a tangible asset over its useful life.
 Formula:
For Straight-Line Depreciation:
Depreciation per year=Cost of Asset−Salvage ValueUseful Life\text{Depreciation per

year} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Useful
Life}}Depreciation per year=Useful LifeCost of Asset−Salvage Value
Causes of Depreciation:
1. Wear and Tear:

o Physical deterioration due to regular use.
o Example: Machinery, vehicles, and equipment that degrade over time.
2. Obsolescence:
o Loss in value due to technological advancements, making the asset outdated.
o Example: Old software or equipment replaced by more efficient technology.
3. Usage:
o Depreciation is proportional to the asset’s usage, as higher usage leads to faster
wear.
o Example: Heavy machinery used in construction work depreciates faster.
4. Time:
o Even without usage, assets lose value due to time and market conditions.
o Example: Buildings and infrastructure aging over time.

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1.

>The decision-making cycle in engineering economics involves systematic steps

1. Problem Definition: Clearly define the problem or objective to address.

Understanding these costs is essential for effective economic decision-making in engineering

=Cost Estimation Models (Short Notes)

3.> What is time value of money ? give examples?

Examples in Engineering Economics

1. Present Value (PV) Calculation:

4.>Nominal Interest vs. Effective Interest

 Given: Nominal Interest Rate = 12% per year, compounded monthly.

ieff=(1+0.1212)12−1=(1+0.01)12−1=1.1268−1=0.1268 or 12.68%.i_{\text{eff}} = \left(1

 Result: The effective interest rate is 12.68% per year.

Importance in Engineering Economics:

5.>Write short notes on Probability & Joint Probability.

 Definition: Probability of two or more events occurring simultaneously.

7.> Internal Rate of Return (IRR)

∑Cash Flows(1+IRR)t=Initial Investment\sum \frac{\text{Cash Flows}}{(1 + \

7.> Net Present Value (NPV)

NPV=∑Cash Inflows(1+r)t−Initial InvestmentNPV = \sum \frac{\text{Cash Inflows}}{(1

o rrr = Discount rate

Depreciation per year=Cost of Asset−Salvage ValueUseful Life\text{Depreciation per

1. Wear and Tear:

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