Engineering Economics, Project Management, and Professional Ethics
What this domain tests
This domain covers investment appraisal, cost comparison, project scheduling, earned value, and the ethical duties of an engineer.
Core rules
- NPV discounts all cash flows at the required rate: NPV = sum of CF_t/(1+r)^t. Accept positive-NPV projects; choose the highest NPV among mutually exclusive options.
- Payback period ignores the time value of money and cash flows after payback; IRR is the discount rate giving zero NPV and can mislead with non-conventional cash flows.
- Annual equivalent cost is useful when alternatives have different lives.
- CPM/PERT: the critical path has zero total float and sets project duration. Total float is the amount an activity can slip without delaying the project.
- Earned value: CPI = EV/AC and SPI = EV/PV. CPI below 1 means over budget; SPI below 1 means behind schedule.
- Ethics: practise only within competence, disclose conflicts of interest, protect public safety, and sign only work you have supervised or verified.
Worked example
An equipment upgrade costs 100,000 and saves 30,000 per year for five years. The discount rate is 10%. Find NPV. Annuity factor = (1 - 1.1^-5)/0.1 = 3.791. PV of savings = 30,000 x 3.791 = 113,730. NPV = 113,730 - 100,000 = +13,730. The project is acceptable on NPV grounds; payback is 100,000/30,000 = 3.33 years.
Traps
- Mixing nominal cash flows with a real discount rate.
- Ignoring salvage value or residual life in cost comparisons.
- Confusing total float with free float.
- Reversing CPI and SPI interpretation.
- Accepting a technically unsafe instruction because a client demands it.