Engineering Economics
What to master
The core is the time value of money: single-payment factors (P/F, F/P), uniform-series factors (P/A, A/P, A/F, F/A), gradient and geometric-gradient factors, and the correct compounding convention (discrete annual vs nominal rate with m periods, effective annual rate = (1 + r/m)^m - 1). Then build cash flows and compare alternatives using present worth, annual worth, future worth, internal rate of return, payback period, and benefit-cost ratio. Understand depreciation (straight-line, MACRS), book value, replacement analysis, inflation-adjusted versus actual dollars, and the minimum attractive rate of return as the decision threshold.
Traps
- Annuity due (payments at the beginning of the period) versus ordinary annuity (end). Standard factor tables are ordinary annuities; adjust by multiplying by (1 + i).
- Salvage value is a cash inflow in the final period -- omitting it flips the answer.
- Unequal service lives cannot be compared by present worth directly; use annual worth or a common study period.
- IRR can have multiple roots or none when the cash flow changes sign more than once.
- Nominal rates quoted with monthly compounding are not the effective annual rate.
Worked example
A $10,000 payment due in 5 years at 8% annual compound interest has present worth P = F/(1 + i)^n = 10,000/(1.08)^5 = 10,000/1.4693 = $6,806.
Rule of thumb: draw the cash flow diagram with arrows before selecting a factor -- the diagram prevents the begin/end-of-period and salvage-sign errors that cause most lost points here.