Engg Economics And Cost Analysis Notes Pdf

engg economics and cost analysis notes pdf

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Cost—benefit analysis CBA , sometimes also called benefit—cost analysis , is a systematic approach to estimating the strengths and weaknesses of alternatives used to determine options which provide the best approach to achieving benefits while preserving savings for example, in transactions, activities, and functional business requirements. It is commonly used in commercial transactions, business or policy decisions particularly public policy , and project investments. For example, the U.

Securities and Exchange Commission has to conduct cost-benefit analysis before instituting regulations or de-regulations. CBA has two main applications: [3]. CBA is related to cost-effectiveness analysis. Benefits and costs in CBA are expressed in monetary terms and are adjusted for the time value of money ; all flows of benefits and costs over time are expressed on a common basis in terms of their net present value , regardless of whether they are incurred at different times.

Other related techniques include cost—utility analysis , risk—benefit analysis , economic impact analysis , fiscal impact analysis, and social return on investment SROI analysis. Cost—benefit analysis is often used by organizations to appraise the desirability of a given policy. It is an analysis of the expected balance of benefits and costs, including an account of any alternatives and the status quo.

CBA helps predict whether the benefits of a policy outweigh its costs and by how much , relative to other alternatives. This allows the ranking of alternative policies in terms of a cost—benefit ratio.

Assuming an accurate CBA, changing the status quo by implementing the alternative with the lowest cost—benefit ratio can improve Pareto efficiency. The value of a cost—benefit analysis depends on the accuracy of the individual cost and benefit estimates. Comparative studies indicate that such estimates are often flawed, preventing improvements in Pareto and Kaldor—Hicks efficiency. He determined that the best method of measuring utility is by learning one's willingness to pay for something.

By taking the sum of each user's willingness to pay, Dupuit illustrated that the social benefit of the thing bridge or road or canal could be measured. Some users may be willing to pay nearly nothing, others much more, but the sum of these would shed light on the benefit of it.

It should be reiterated that Dupuit was not suggesting that the government perfectly price-discriminate and charge each user exactly what they would pay. Rather, their willingness to pay provided a theoretical foundation on the societal worth or benefit of a project. The cost of the project proved much simpler to calculate. Simply taking the sum of the materials and labor, in addition to the maintenance afterward, would give one the cost. Now, the costs and benefits of the project could be accurately analyzed, and an informed decision could be made.

CBA's application to broader public policy began with the work of Otto Eckstein , [13] who laid out a welfare economics foundation for CBA and its application to water-resource development in It was applied in the US to water quality, [14] recreational travel, [15] and land conservation during the s, [16] and the concept of option value was developed to represent the non-tangible value of resources such as national parks.

CBA was expanded to address the intangible and tangible benefits of public policies relating to mental illness, [18] substance abuse, [19] college education, [20] and chemical waste. Government guidebooks for the application of CBA to public policies include the Canadian guide for regulatory analysis, [22] the Australian guide for regulation and finance, [23] and the US guides for health-care [24] and emergency-management programs.

CBA for transport investment began in the UK with the M1 motorway project and was later used for many projects, including the London Underground 's Victoria line. This presented balanced cost—benefit results and detailed environmental impact assessments.

NATA was first applied to national road schemes in the Roads Review, and was subsequently rolled out to all transport modes. Maintained and developed by the Department for Transport , it was a cornerstone of UK transport appraisal in Transport Canada promoted CBA for major transport investments with the publication of its guidebook.

In health economics , CBA may be an inadequate measure because willingness-to-pay methods of determining the value of human life can be influenced by income level. For some environmental effects, cost—benefit analysis can be replaced by cost-effectiveness analysis. This is especially true when one type of physical outcome is sought, such as a reduction in energy use by an increase in energy efficiency.

Using cost-effectiveness analysis is less laborious and time-consuming, since it does not involve the monetization of outcomes which can be difficult in some cases.

It has been argued that if modern cost—benefit analyses had been applied to decisions such as whether to mandate the removal of lead from gasoline, block the construction of two proposed dams just above and below the Grand Canyon on the Colorado River , and regulate workers' exposure to vinyl chloride , the measures would not have been implemented although all are considered highly successful. A generic cost—benefit analysis has the following steps: [40]. CBA attempts to measure the positive or negative consequences of a project.

A similar approach is used in the environmental analysis of total economic value. Both costs and benefits can be diverse. Costs tend to be most thoroughly represented in cost—benefit analyses due to relatively-abundant market data. The net benefits of a project may incorporate cost savings, public willingness to pay implying that the public has no legal right to the benefits of the policy , or willingness to accept compensation implying that the public has a right to the benefits of the policy for the policy's welfare change.

The guiding principle of evaluating benefits is to list all parties affected by an intervention and add the positive or negative value usually monetary that they ascribe to its effect on their welfare. The actual compensation an individual would require to have their welfare unchanged by a policy is inexact at best. Surveys stated preferences or market behavior revealed preferences are often used to estimate compensation associated with a policy.

Stated preferences are a direct way of assessing willingness to pay for an environmental feature, for example. Revealed preference is an indirect approach to individual willingness to pay.

People make market choices of items with different environmental characteristics, for example, revealing the value placed on environmental factors. The value of human life is controversial when assessing road-safety measures or life-saving medicines. Controversy can sometimes be avoided by using the related technique of cost—utility analysis, in which benefits are expressed in non-monetary units such as quality-adjusted life years. Road safety can be measured in cost per life saved, without assigning a financial value to the life.

However, non-monetary metrics have limited usefulness for evaluating policies with substantially different outcomes. Other benefits may also accrue from a policy, and metrics such as cost per life saved may lead to a substantially different ranking of alternatives than CBA. Another metric is valuing the environment, which in the 21st century is typically assessed by valuing ecosystem services to humans such as air and water quality and pollution.

CBA generally attempts to put all relevant costs and benefits on a common temporal footing, using time value of money calculations.

A smaller rate values the current generation and future generations equally. Larger rates a market rate of return, for example reflects human present bias or hyperbolic discounting : valuing money which they will receive in the near future more than money they will receive in the distant future. Empirical studies suggest that people discount future benefits in a way similar to these calculations.

An example is the equity premium puzzle , which suggests that long-term returns on equities may be higher than they should be after controlling for risk and uncertainty. If so, market rates of return should not be used to determine the discount rate because they would undervalue the distant future. For publicly traded companies, it is possible to find a project's discount rate by using an equilibrium asset pricing model to find the required return on equity for the company and then assuming that the risk profile of a given project is similar to that the company faces.

A generalization of these methods can be found in arbitrage pricing theory , which allows for an arbitrary number of risk premiums in the calculation of the required return. Risk associated with project outcomes is usually handled with probability theory. Although it can be factored into the discount rate to have uncertainty increasing over time , it is usually considered separately. Particular consideration is often given to agent risk aversion : preferring a situation with less uncertainty to one with greater uncertainty, even if the latter has a higher expected return.

Uncertainty in CBA parameters can be evaluated with a sensitivity analysis , which indicates how results respond to parameter changes. A more formal risk analysis may also be undertaken with the Monte Carlo method. Suppose that we have sources of uncertainty in a CBA that are best treated with the Monte Carlo method, and the distributions describing uncertainty are all continuous.

How do we go about choosing the appropriate distribution to represent the sources of uncertainty? Suppose that we impose a series of constraints that must be satisfied:. Examples of commonly used continuous maximum entropy distributions in simulations include:.

During the s, academic and institutional critiques of CBA emerged. The three main criticisms were: [48]. These criticisms continued under the Clinton administration during the s.

Clinton furthered the anti-regulatory environment with his Executive Order Criticisms of CBA including uncertainty valuations, discounting future values, and the calculation of risk were used to argue that it should play no part in the regulatory process. Some analysts oppose the use of CBA in policy-making, and those in favor of it support improvements in analysis and calculations.

CBA has been criticized in some disciplines as it relies on the Kaldor-Hicks criterion which does not take into account distributional issues. This means, that positive net-benefits are decisive, independent of who benefits and who loses when a certain policy or project is put into place. Phaneuf and Requate p. This has allowed economists to stay silent on issues of equity, while focussing on the more familiar task of measuring costs and benefits".

The main criticism stems from the diminishing marginal utility of income. One reason for this is that for high income people, one monetary unit is worth less relative to low income people, so they are more willing to give up one unit in order to make a change that is favourable for them. A second reason is that any welfare change, no matter positive or negative, affects people with a lower income stronger than people with a higher income.

Taken together, this means that not using weights is a decision in itself — richer people receive de facto a bigger weight. As to compensate for this difference in valuation and in order to take into account distributional issues, it is possible to use different methods.

The two most common ones are taxation, e. There are a number of different approaches for calculating these weights. Often, a Bergson- Samuelson social welfare function is used and weights are calculated according to the willingness-to-pay of people. From Wikipedia, the free encyclopedia. Systematic approach to estimating the strengths and weaknesses of alternatives.

SA Journal of Information Management. Archived from the original PDF on Retrieved Huesemann In Livermore, Michael A. New York: Oxford University Press. Princeton University Press.

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Fixed costs might include the cost of building a factory, insurance and legal bills. Variable Costs VC Costs which depend on the output produced. For example, if you produce more cars, you have to use more raw materials such as metal. This is a variable cost. Semi-Variable Cost. Labour might be a semi-variable cost.

Toggle navigation. About us Courses Contact us. Lecture Economic order quantity Lecture Problem solving based on Breakeven analysis and EOQ Unit 7 Lecture Cost estimation: Methods of cost estimation, Adjustment of data, Learning Lecture cost estimating relationships Lecture Introduction to decision under risk Criteria for decision under risk Lecture Expected value decision making under risk Lecture Expected variance decision making under risk Unit 8 Lecture Problem solving based on decision under risk Lecture Income taxes: Principles and calculation of effective income tax rates Lecture Effect of method of depreciation on income taxes Lecture After tax economic analysis Lecture Problem solving based on Income tax analysis. English Sl. Download Verified 2. Lecture Some economic concepts, Value and utility, Interest and Interest rate, Time value of money.

Following a consistent methodology and format for all construction cost estimates submitted. Engineering and Supervision: Administrative and Design. Direct costs are those linked to the physical construction of a project. Thus type of estimate need to have a design available to get such required details. In general,. Based on actual historical data.

These notes have been prepared to help the students of BPUT in their preparation for the method, Cost-benefit analysis in public projects. Depreciation policy Sasmita Mishra, “Engineering Economics & Costing “, PHI. 2. Sullivan and.

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Download PDF. Lecture files. Illustrates these issues using three specific policy issues: 1 injury. Interval Estimation Lecture Notes.

[AE AEE NOTES] Economics – AE AEE Ace Academy Handwritten Notes – Free Download PDF

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Citizens of Nitro, city planners, and site managers are. Microeconomics is the branch of economics that pertains to decisions made at the individual level, such as the choices individual consumers and companies make after evaluating resources, costs, and tradeoffs. Breaking science news and articles on global warming, extrasolar planets, stem cells, bird flu, autism, nanotechnology, dinosaurs, evolution -- the latest discoveries.

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Make or buy decision, Value engineering — Function, aims, Value engineering procedure. Interest formulae and their applications —Time value of money, Single payment compound amount factor, Single payment present worth factor, Equal payment series sinking fund factor, Equal payment series payment Present worth factor- equal payment series capital recovery factor — Uniform gradient series annual equivalent factor, Effective interest rate, Examples in all the methods. Replacement and Maintenance analysis — Types of maintenance, types of replacement problem, determination of economic life of an asset, Replacement of an asset with a new asset — capital recovery with return and concept of challenger and defender, Simple probabilistic model for items which fail completely. Question Papers. Question Banks.

Cost–benefit analysis




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