VALUE ANALYSIS

Value Analysis is the systematic application of

recognized techniques which identify the
function of a product or service, establish a
monetary value for the function and provide the
necessary function reliably at the lowest overall
cost.
It is an organized approach to identify unnecessary
costs associated with any product, material part,
component, system or service by analyzing the
function and eliminating such costs without impairing
the quality, functional reliability, or the capacity of the
product to give service.
WHEN TO APPLY VALUE ANALYSIS
One can definitely expect very good results by initiating a VA
programme if one or more of the following symptoms are
present:
1. Company’s products show decline in sales.
2. Company’s prices are higher than those of its competitors.
3. Raw materials cost has grown disproportionate to the
volume of production.
4. New designs are being introduced.
5. The cost of manufacture is rising disproportionate to the
volume of production.
6. Rate of return on investment has a falling trend.
7. Inability of the firm to meet its delivery commitments.
 Value Analysis vs. Value Engineering
Value Analysis Value Engineering

Indicates application on the Indicates application on the product

product that is into at its design stage
manufacturing.
Workers, subcontractors and Done by a specific product
engineers come together to make a design
team with experience and team (Engineers)
knowledge
May change the present stage of Changes are executed at the initial
the product or operation stages only.

Worked out mostly with the help Requires specific technical knowledge
of knowledge and experience
• Though the philosophy underlying the two is same, i.e.
identification of unnecessary cost, yet they are different.
The difference lies in the time and the stage at which the
techniques are applied.
• Value analysis is the application of a set of techniques to an
existing product with a view to improve its value. It is thus
a remedial process.
• Value engineering is the application of exactly the same set
of techniques to a new product at the design stage, project
concept or preliminary design when no hardware exists to
ensure that bad features are not added. Value engineering,
therefore, is a preventive process
Cost value. It is the summation of the labour, material,
overhead and all other elements of cost required to produce an
item or provide a service compared to a base.

Exchange value. It is the measure of all the properties,

qualities and features of the product, which make the product
possible of being traded for another product or for money. In a
conventional sense, exchange value refers to the price that a
purchaser will offer for the product, the price being dependent
upon satisfaction (value) which he derives from the product.
Value derived from the product consists of two parts “use
value” and “esteem value”, which are now described.
Use value. It is known as the function value. The use value
is equal to the value of the functions performed. Therefore,
it is the price paid by the buyer (buyer’s view), or the cost
incurred by the manufacturer (manufacturer’s view) in order
to ensure that the product performs its intended functions
efficiently. The use value is the fundamental form of
economic value. An item without “use value” can have
neither “exchange value” nor “esteem value
Esteem value. It involves the qualities and appearance of a
product (like a TV set), which attract persons and create in
them a desire to possess the product. Therefore, esteem
value is the price paid by the buyer or the cost incurred by
the manufacturer beyond the use value.
What is meant by term Value?
• Value is a function of ‘Desired Performance’ and
‘Cost’.
• Expressed as Desired Performance (P) ÷ Overall
Costs (C)
• Desired performance is expressed by the term
worth which is defined as the lowest cost to
achieve the Use (work) function and Aesthetic
(sell) function.

7
FUNCTION
• Function is the purpose for which the product
is made. Identification of the basic functions
and determination of the cost currently being
spent on them are the two major
considerations of value analysis.
 Classification of the functions

Functions can be classified into

the following three categories:
• Primary function
• Secondary function
• Tertiary function
• Primary functions are the basic functions for which the
product is specially designed to achieve. Primary functions,
therefore, are the most essential functions whose non-
performance would make the product worthless, e.g. a photo
frame exhibits photographs, a chair supports weight, a
fluorescent tube gives light.
• Secondary functions are those which, if not in-built, would not
prevent the device from performing its primary functions, e.g.,
arms of a chair provide support for hands. Secondary functions
are usually related to convenience. The product can still work
and fulfill its intended objective even if these functions are not
in-built and yet they may be necessary to sell the product.
• Tertiary functions are usually related to esteem appearance.
For example, Sunmica top of a table gives esteem appearance
for the table.
• Let us consider a single example of painting a
company bus to explain all the above three
functions. Here, the primary function of
painting is to avoid corrosion. The secondary
function is to identify the company to which
the bus belongs by the colour of the paint (e.g.
blue colour for Ashok Leyland Ltd.). The
tertiary function is to impart a very good
appearance to the bus by using brilliant colours.
 AIMS OF VE

The aims of value engineering are as follows:

• Simplify the product.
• Use (new) cheaper and better materials.
• Modify and improve product design.
• Use efficient processes.
• Reduce the product cost.
• Increase the utility of the product by economical
means.
• Save money or increase the profits.
 VALUE ENGINEERING PROCEDURE

The basic steps of value engineering are as follows:

(a) Blast (i) Identify the product.
(ii)Collect relevant information.
(iii)Define different functions.
(b) Create (iv) Different alternatives.
(v) Critically evaluate the alternatives.
(c) Refine (vi) Develop the best alternative.
(vii) Implement the alternative.
 INTEREST FORMULAS AND
THEIR APPLICATIONS
• Interest rate is the rental value of money. It
represents the growth of capital per unit
period. The period may be a month, a quarter,
semiannual or a year
TIME VALUE OF MONEY
• If an investor invests a sum of Rs. 100 in a
fixed deposit for five years with an interest
rate of 15% compounded annually, the
accumulated amount at the end of every year
will be as shown in Table
Year end Interest Compound amount
(Rs.) (Rs.)
0 100.00
1 15.00 115.00
2 17.25 132.25
3 19.84 152.09
4 22.81 174.90
5 26.24 201.14
The formula to find the future worth in the third
column is
F = P × (1 + i)n
• where
P = principal amount invested at time 0,
F = future amount,
i = interest rate compounded annually,
n = period of deposit
• The maturity value at the end of the fifth year
is Rs.201.14. This means that the amount Rs.
201.14 at the end of the fifth year is equivalent
to Rs. 100.00 at time 0 (i.e. at present).
• This is diagrammatically shown in Fig 3.1.
This explanation assumes that the inflation is
at zero percentage
• Alternatively, the above concept may be
discussed as follows: If we want Rs. 100.00
at the end of the nth year, what is the amount
that we should deposit now at a given interest
rate, say 15%? A detailed working is shown in
Table 3.2.
Present Worth Amounts
End of year Present worth Compound amount
(n) after n year(s)
0 100
1 86.96 100
2 75.61 100
3 65.75 100
4 57.18 100
5 49.72 100
6 43.29 100
7 37.59 100
8 32.69 100
9 28.43 100
10 24.72 100
• The formula to find the present worth in the
second column is
 

From Table 3.2, it is clear that if we want Rs. 100 at the end
of the fifth year, we should now deposit an amount of Rs.
49.72. Similarly, if we want Rs. 100.00 at the end of the
10th year, we should now deposit an amount of Rs. 24.72.
Interest rate can be classified into
• Simple interest rate
• Compound interest rate.
In simple interest, the interest is calculated, based on
the initial deposit for every interest period. In this
case, calculation of interest on interest is not
applicable.
In compound interest, the interest for the current
period is computed based on the amount (principal
plus interest up to the end of the previous period) at
the beginning of the current period.
 NOTATIONS
The notations which are used in various interest formulae are as
follows:
P = principal amount
n = No. of interest periods
i = interest rate (It may be compounded monthly, quarterly,
semiannually or annually)
F = future amount at the end of year n
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 period 1
 Single-Payment Compound Amount

• Here, the objective is to find the single future

sum (F) of the initial payment (P) made at
time 0 after n periods at an interest rate i
compounded every period. The cash flow
diagram of this situation is shown in Fig. 3.2.
The formula to obtain the single-payment
compound amount is
F = P(1 + i)n = P(F/P, i, n)

Where (F/P, i, n) is called as single-payment

compound amount factor.
EXAMPLE 3.1 A person deposits a sum of Rs. 20,000 at the
interest rate of 18% compounded annually for 10 years. Find the
maturity value after 10 years.

Solution
P = Rs. 20,000
i = 18% compounded annually
n = 10 years
F = P(1 + i)n = P(F/P, i, n)
= 20,000 (F/P, 18%, 10)
= 20,000 × 5.234 = Rs. 1,04,680
The maturity value of Rs. 20,000 invested now at 18%
compounded yearly is equal to Rs. 1,04,680 after 10 years.
 Single-Payment Present Worth Amount
Here, the objective is to find the present worth
amount (P) of a single future sum (F) which will be
received after n periods at an interest rate of i
compounded at the end of every interest period.
The corresponding cash flow diagram is shown in
Fig. 3.3.
EXAMPLE 3.2 A person wishes to have a future sum of Rs. 1,00,000 for
his son’s education after 10 years from now. What is the single-payment
that he should deposit now so that he gets the desired amount after 10
years? The bank gives 15% interest rate compounded annually.
Solution
F = Rs. 1,00,000
i = 15%, compounded annually
n = 10 years
P = F/(1 + i)n = F(P/F, i, n)
= 1,00,000 (P/F, 15%, 10)
= 1,00,000 × 0.2472
= Rs. 24,720
The person has to invest Rs. 24,720 now so that he will get a sum
of Rs. 1,00,000 after 10 years at 15% interest rate compounded annually.
 Equal-Payment Series Compound Amount
In this type of investment mode, the objective is to
find the future worth of n equal payments which are
made at the end of every interest period till the end
of the nth interest period at an interest rate of i
compounded at the end of each interest period. The
corresponding cash flow diagram is shown in Fig.
3.4.
(F/A, i, n) is termed as equal-payment series compound amount factor
EXAMPLE 3.3 A person who is now 35 years old is
planning for his retired life. He plans to invest an
equal sum of Rs. 10,000 at the end of every year for
the next 25 years starting from the end of the next
year. The bank gives 20% interest rate, compounded
annually. Find the maturity value of his account when
he is 60 years old.
• Solution
• A = Rs. 10,000
• n = 25 years
• i = 20%
• F=?
 Equal-Payment Series Sinking Fund

• In this type of investment mode, the objective

is to find the equivalent amount (A) that
should be deposited at the end of every interest
period for n interest periods to realize a future
sum (F) at the end of the nth interest period at
an interest rate of i.
• The corresponding cash flow diagram is
shown in Fig. 3.6.
Equal-Payment Series Present Worth Amount
The objective of this mode of investment is to
find the present worth of an equal payment made
at the end of every interest period for n interest
periods at an interest rate of i compounded at the
end of every interest period.
The corresponding cash flow diagram is shown in
Fig. 3.8. Here,
P = present worth
A = annual equivalent payment
i = interest rate
n = No. of interest periods The formula to
compute P is
• EXAMPLE 3.5 A company wants to set up a reserve which
will help the company to have an annual equivalent amount of
Rs. 10,00,000 for the next 20 years towards its employees
welfare measures. The reserve is assumed to grow at the rate
of 15% annually. Find the single-payment that must be made
now as the reserve amount.

• Solution
• A = Rs. 10,00,000
• i = 15%
• n = 20 years
• P=?
• The corresponding cash flow diagram is illustrated in Fig. 3.9.
 Equal-Payment Series Capital Recovery
Amount

• The objective of this mode of investment is to

find the annual equivalent amount (A) which
is to be recovered at the end of every interest
period for n interest periods for a loan (P)
which is sanctioned now at an interest rate of i
compounded at the end of every interest
period (see Fig. 3.10).
EXAMPLE 3.6 A bank gives a loan to a
company to purchase an equipment worth Rs.
10,00,000 at an interest rate of 18% compounded
annually. This amount should be repaid in 15
yearly equal installments. Find the installment
amount that the company has to pay to the bank
• Solution
• P = Rs. 10,00,000
• i = 18%
• n = 15 years
• A=?
 Uniform Gradient Series Annual
Equivalent Amount
The objective of this mode of investment is to find the
annual equivalent amount of a series with an amount A1
at the end of the first year and with an equal increment
(G) at the end of each of the following n – 1 years with
an interest rate i compounded annually.
The corresponding cash flow diagram is shown in Fig.
3.12.
The formula to compute A under this situation is
• EXAMPLE 3.7 A person is planning for his
retired life. He has 10 more years of service.
He would like to deposit 20% of his salary,
which is Rs. 4,000, at the end of the first year,
and thereafter he wishes to deposit the
amount with an annual increase of Rs. 500 for
the next 9 years with an interest rate of 15%.
Find the total amount at the end of the 10th
year of the above series.
Here,
A1 = Rs. 4,000
G = Rs. 500
i = 15%
n = 10 years
A=?&F=?
This is equivalent to paying an equivalent amount of Rs.
5,691.60 at the end of every year for the next 10 years. The
future worth sum of this revised series at the end of the 10th
year is obtained as follows:
• EXAMPLE 3.8 A person is planning for his
retired life. He has 10 more years of service.
He would like to deposit Rs. 8,500 at the end
of the first year and thereafter he wishes to
deposit the amount with an annual decrease
of Rs. 500 for the next 9 years with an interest
rate of 15%. Find the total amount at the end
of the 10th year of the above series.
• Solution Here, A1 = Rs. 8,500 G = –Rs. 500
• i = 15%
• n = 10 years
• A=?&F=?
 Effective Interest Rate
Let i be the nominal interest rate compounded annually.
But, in practice, the compounding may occur less than a
year. For example, compounding may be monthly,
quarterly, or semi-annually.

Compounding monthly means that the interest is

computed at the end of every month. There are 12 interest
periods in a year if the interest is compounded monthly.
Under such situations, the formula to compute the
effective interest rate, which is compounded annually, is
where,
i = the nominal interest rate
C = the number of interest periods in a
year.
EXAMPLE 3.9 A person invests a sum of Rs. 5,000 in a bank at a
nominal interest rate of 12% for 10 years. The compounding is
quarterly. Find the maturity amount of the deposit after 10 years.