Comparison of alternatives having different useful life:

When the useful lives of mutually exclusive alternatives are
different,
(a) Repeatability assumption may be used in their comparison of
the study period can be infinite in length or a common
multiple of the useful lives.
- The economic consequence that are estimated to happen in an
alternative’s initial life span will also in all succeeding life
span (replacement).
- Actual situation in engineering practice seldom meet this
condition. This has tended to limit the use of the repeatability
assumption, except in those situation where difference between
the annual worth of the first life cycle and the annual worth
over more than one cycle of the assets involved is quite small.
(b) Coterminated assumption may be used in their comparison if
study period is finite and identical. This is the approach most
frequently used in engineering practice because product life
cycle are becoming shorter.
- To force a match of cash flow durations to the
cotermination time, adjustment are made to cash flow
estimates of the project alternatives having useful life
different from the study period.

Cmparison of alternative using capitalized worth method (CW method):

Capitalized worth (CW) is the present worth of all receipts or
expenses over an infinite length of time. This method of
comparison is called CW method. If only expenses are Considered
we called it capitalized cost method. This method is used for
comparing mutually exclusive alternatives when period of service
needed is indefinitely large or common multiple of lives is very
long , and repeatability assumption is applicable.
CW of a perpetual series of end of period uniform
payment A with interest at i% per period is A(P/A,i%,∞ )
Capitalized worth of A,
P = A(P/A,i%, ∞ )

Classification of cost:

Primary cost and Overhead cost

The element of cost mention above, i.e material cost, labour cost
and expense, constitute the total cost. The total is cost is generally
calssified into prime cost and overhad cost.
Prime cost: It is the direct cost that can be reasonably measure
and allocated to a specific output or work activity. Thus it is the
aggregate of direct material cost, direct labour cost and direct
expenses.
Overhead cost: It is indirect cost that cannot be reasonably
measure and allocated to specific output or activities. Overhead
cost is the sum of indirect material cost, indirect labour cost,
indirect expenses.

Component of prime cost:

a. Direct material cost:

i. Material including component parts, specially purchased
requisitioned for a particular job ordered or processed.
ii. Material processing from one operation or process to
another.
iii. Primary packing materials such as cartoon cardboard box
etc.

b. Direct labour cost:
i. Labour engaged in altering the condition , conformation and
composition of the product.
ii. Inspector, analyst etc specially required for such production.
iii. If specially identified, the wage of foreman, chargehands, shopclerks,
ways of internal transport personal etc.

c. Direct expenses:
i. cost of special design, drawing and layouts.
ii. Hire of special tools and equipment for a particular job.
iii. Maintenance cost of such tools and equipment.
Components cost of Overhead cost: Overhead cost may be of 4
types – production overhead, administration overhead, selling
overhead, distribution overhead.
Here component of production are given:
i. Indirect material cost.
ii. Indirect labour cost.
iii. Indirect expenses.
Indirect material cost: Indirect material is the material that can
not be traced in the finished product. E.g lubricants , cotton, waste,
grease, small tools. How ever some minor items which enter into
production and form pars of its are conveniently treated as indirect
material. Such as cost of thread in shirt in shirt making cost.
Indirect labour cost: Labour cost not charged directly are indirect
labour cost. In general salary or wage of the following are treated
as indirect wages: foreman, supervisor, maintenance labour etc.

Indirect expenses:

a. Rent, rates(taxes) , insurance in relation to factory.
b. Depression, power and fuel, repair and maintenance of plant
machinery and building.
c. Other sundry expenses like first aid employment etc.

Cash flow:

The actual rupees coming into or out of a firm.
Cash inflow: Actual rupees coming into a firm.
Cash outflow: Actual rupees paid out by a firm.
1 2 3 4 5 6 = np
The use of cash flow (time) diagrams/ tables is strongly
recommended for situations in which the analyst needs to clarify or
visualize what is involved when flows of money occurs at various
times.

The cash flows employs several conditions:
1. The horizontal line is time scale with progression of time
moving from left to right. The period (eg year, quarter,
month) labels can be applied to intervals of time rather then
to point on the scale.
2. The arrows signify cash flows and are placed at the end of
the period. If a distinction needs to be made, downward
arrows represent expenses ( negative cash flow or cash
outflows) and upward arrows represents receipts (positive
cash flow or cash inflow).
3. The Cash flow diagram is dependent on the point of views.
For examples the cash flows shows above in the figure are
based on the cash flow as seen by the lender.

Economys: Definition

Economys: Economy, the attainmet of an objective at low cost in
terms of resource , input has always been associated with
engineering.
Economics deals with the behavior of people individually
and collectively, particularly as their behavior relates to the
satisfaction of their wants.
Because of resource constants , engineering must be closely
associated with economy. It is essential that engineering proposals
be evaluated in terms of worth and cost before they are
undertaken.