Economics for Engineers (Humanities-II)

What are the three types of cash flows presented on the statement
of cash flows?
The three types of cash flows presented on the statement of cash
flows are:
1. Operating Activities: Cash flows generated from the core
business operations, such as receipts from sales of goods or
services and payments to suppliers or employees.
2. Investing Activities: Cash flows from buying or selling long-term
assets, such as equipment, property, or investments.
3. Financing Activities: Cash flows related to funding the business,
including issuing shares, borrowing, repaying loans, and paying
dividends.
3. What is Green Engineering?
Green Engineering refers to the design, development, and
implementation of products, processes, and systems that minimize
environmental impact while ensuring sustainability. It emphasizes the
use of renewable resources, energy efficiency, waste reduction, and
safe production practices. Green Engineering aims to protect the
environment, conserve natural resources, and improve societal well-
being without compromising economic feasibility.
4. Write a short note on expenditures for depreciable assets by
business firms.
Expenditures on depreciable assets involve investing in long-term
assets like machinery, buildings, or vehicles that are used in business
operations over time. These assets gradually lose value due to wear
and tear or obsolescence, and their cost is allocated as depreciation
over their useful life. Such expenditures are critical for business
growth, productivity enhancement, and maintaining operational
efficiency.
5. Is there any necessity of discrete probability distribution?
Yes, discrete probability distributions are essential in statistics and
decision-making. They represent the probabilities of outcomes of a
random variable that takes distinct, countable values, such as the
number of customers visiting a store or rolling a die. Discrete
probability distributions are necessary for modeling real-world
phenomena, analyzing patterns, and making informed predictions in
fields like economics, business, and engineering.
6. 'Estimation is the foundation of economic analysis'--Explain.
Estimation forms the basis of economic analysis as it involves
predicting and evaluating key parameters, such as demand, supply,
costs, and benefits, in uncertain scenarios. It provides a framework
for decision-making, resource allocation, and policy formulation by
assessing potential outcomes. Accurate estimation enables
economists to model trends, optimize strategies, and guide
stakeholders toward achieving economic goals efficiently.
Here’s a 5-mark answer to each of the questions:

Benefit-Cost Ratio (BCR)

(a) What Is the Benefit-Cost Ratio (BCR)?
The Benefit-Cost Ratio (BCR) is a financial metric that compares the
benefits of a project or investment to its costs, expressed as a ratio
(e.g., benefits/costs).
(b) What Is the Benefit-Cost Ratio (BCR) Used for?
It is used to evaluate the feasibility of projects or investments. A
higher BCR indicates that the benefits significantly outweigh the
costs, making the project more desirable.
(c) What Does a Benefit-Cost Ratio Over 1.0 Suggest?
A BCR over 1.0 suggests that the benefits of the project exceed its
costs, indicating the project is financially viable.
(d) What are the Limitations of the BCR?
Limitations include the exclusion of non-monetary benefits,
sensitivity to assumptions about discount rates, and reliance on
accurate cost and benefit estimates.

Time Value of Money

(a) What is the time value of money?
The time value of money (TVM) is the concept that a sum of money is
worth more now than in the future due to its earning potential.
(b) What is the difference between annually and continuously
compounding interest?
Annually compounding interest calculates interest once per year,
while continuously compounding calculates interest constantly,
leading to higher returns.
(c) What does net present value mean?
Net Present Value (NPV) is the difference between the present value
of cash inflows and outflows of an investment, used to assess
profitability.
(d) Why is the time value of money important?
It is crucial for making informed financial decisions, comparing
investment options, and evaluating future cash flows.

Learning Curve and Triangulation

(a) Explain the improvement with Learning Curve.
The learning curve shows that as production increases, workers
become more efficient, reducing costs and improving performance
over time.
(b) What is triangulation?
Triangulation is the process of using multiple methods, data sources,
or perspectives to validate findings or make decisions.

Future Worth
(a) What are the advantages of Future Worth?
Future worth helps in comparing investments by calculating their
value at a specific future time, offering insights into long-term
benefits.
(b) What are the disadvantages of Future Worth?
It relies on accurate estimates of future cash flows and discount
rates, which can be uncertain and subject to change.

Consumer Price Index (CPI) and Inflation

(a) How is CPI used to measure inflation?
The CPI measures inflation by tracking changes in the price of a
basket of goods and services over time, reflecting the cost of living.
(b) Does an increase in CPI mean inflation?
Yes, an increase in CPI typically indicates inflation, as it shows rising
prices of goods and services.

Probability Distributions for the Annual Benefit and Life of a Project

(c) What are the probability distributions for the annual benefit and
life?
 Annual Benefit Distribution:
o Most likely value: $8000 (60% probability).
 o $5000 (30% probability).
o $10,000 (highest likely value).
 Life Distribution:
o Life of 6 years: Twice as likely as a life of 9 years.
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Continuing with the explanations for each question:

Future Worth (Continued)

(a) Advantages of Future Worth (Detailed):
1. Ease of Comparison: It simplifies the comparison of
investments by projecting all cash flows to a single future point.
2. Insight into Long-term Impact: Highlights the ultimate value of
investments over time, helping assess the sustainability of
returns.
3. Supports Planning: Useful for aligning investment timelines
with financial goals, especially for projects with delayed returns.
(b) Disadvantages of Future Worth (Detailed):
1. Dependence on Assumptions: Relies on accurate predictions of
future cash flows and discount rates, which are often uncertain.
2. Inflation Impact: May not accurately account for inflation or
changes in purchasing power over time.
 3. Complex Calculations: Requires detailed computation and may
not be intuitive for non-financial stakeholders.

Consumer Price Index (CPI) and Inflation (Continued)

(c) Probability Distributions for the Annual Benefit and Life of the
Project (Detailed):
1. Annual Benefit Distribution:
o $8000 (most likely, 60% probability).
o $5000 (less likely, 30% probability).
o $10,000 (highest likely value, remaining 10% probability).
2. Life of the Project:
o Life of 6 years: Probability = 23\frac{2}{3}32.
o Life of 9 years: Probability = 13\frac{1}{3}31.
These distributions can help estimate the expected benefits and
lifespan of the project for decision-making.
NPV, Profitability Index, and IRR Computation
Data for Projects A and B:
 Cost of Capital = 10%
Year Cash Flow (Project A) Cash Flow (Project B)
0 -70,000 -700,000
1 10,000 50,000
2 20,000 40,000
3 30,000 20,000
4 45,000 10,000
5 60,000 10,000
Year Cash Flow (Project A) Cash Flow (Project B)

Steps:
1. Compute NPV using the formula:
NPV=∑(CashFlowt(1+r)t)−Initial InvestmentNPV = \sum \left(\
frac{Cash Flow_t}{(1 + r)^t}\right) - Initial\
InvestmentNPV=∑((1+r)tCashFlowt)−Initial Investment
2. Compute Profitability Index (PI):
PI=NPV+Initial InvestmentInitial InvestmentPI = \frac{NPV + Initial\
Investment}{Initial\
Investment}PI=Initial InvestmentNPV+Initial Investment
3. Compute Internal Rate of Return (IRR) by solving for rrr in:
∑(CashFlowt(1+r)t)=Initial Investment\sum \left(\frac{Cash Flow_t}{(1
+ r)^t}\right) = Initial\ Investment∑((1+r)tCashFlowt
)=Initial Investment
Calculation Process:
Let’s calculate these values step by step (you may request Python
calculations if needed).

8. Cost Estimation Using Power-Sizing Model

Given:
 Cost index 5 years ago = 120
 Cost of centrifuge 5 years ago = $40,000
 Capacity 5 years ago = 1500 gallons/hour
 Desired capacity today = 4500 gallons/hour
 Current cost index = 320
  Power-sizing exponent (xxx) = 0.75
Formula:
C2=C1⋅(Q2Q1)x⋅I2I1C_2 = C_1 \cdot \left(\frac{Q_2}{Q_1}\right)^x \
cdot \frac{I_2}{I_1}C2=C1⋅(Q1Q2)x⋅I1I2
Substitute values:
C2=40,000⋅(45001500)0.75⋅320120C_2 = 40,000 \cdot \left(\
frac{4500}{1500}\right)^{0.75} \cdot \frac{320}{120}C2
=40,000⋅(15004500)0.75⋅120320
Steps:
1. Compute the scaling factor:
(45001500)0.75\left(\frac{4500}{1500}\right)^{0.75}(15004500
)0.75
2. Adjust for cost index:
320120\frac{320}{120}120320
3. Multiply results to find C2C_2C2.

9. Decision Tree Analysis

Given:
 Alternatives and costs
 Probabilities of sales outcomes:
o Good = 0.30
o Average = 0.60
o Poor = 0.10
 Annual revenues for each alternative based on sales outcomes:
o Provided in the table
Steps:
 1. Construct a decision tree.
2. Calculate the Expected Monetary Value (EMV) for each
alternative:
EMV=∑(Probability of Outcome) × (Revenue - Cost)EMV = \
sum \text{(Probability of Outcome) × (Revenue -
Cost)}EMV=∑(Probability of Outcome) × (Revenue - Cost)
3. Compare EMVs to recommend the best alternative.

10. Ratio Analysis

Data:
 Current Ratio = 2.5
 Acid Test Ratio = 1.5
 Gross Profit to Sales = 0.2
 Net Profit/Working Capital = 0.3
 Sales/Net Fixed Asset = 2
 Sales/Net Worth = 1.5
 Sales/Debtors = 6
 Reserves/Capital = 1
 Net Worth/Long Term Loan = 20
 Stock Velocity = 2 months
 Paid-up Share Capital = ₹10,00,000
Tasks:
1. Prepare a summarized balance sheet based on the given ratios.
2. Analyze the financial health of the company.
11. Write Notes on the Following:
a) Break-even Analysis:
 Explains the point at which total costs equal total revenues.
 Used to determine the level of sales or production necessary to
cover fixed and variable costs.
b) Life-Cycle Costs:
 The total cost of ownership, including acquisition, operation,
maintenance, and disposal costs.
c) Opportunity Costs:
 Represents the benefits lost when choosing one alternative
over another.
d) Probability and Joint Probability:
 Probability: The likelihood of an event occurring.
 Joint Probability: The probability of two events occurring
together.
e) Depreciation:
 The reduction in the value of an asset over time due to wear
and tear or obsolescence.