Engineering Economics
Engineering Economics asks one question in many costumes: is this alternative worth its cost at a given interest rate and horizon?
Core tools
Single payment: F = P(1+i)^n. Uniform series: (P/A, i, n) = [(1+i)^n − 1] / [i(1+i)^n], and (A/P) is its reciprocal. Gradient and geometric-gradient factors appear occasionally. All three worth measures - Present Worth, Annual Worth, Future Worth - rank alternatives identically when lives are equal.
Comparison rules
For mutually exclusive alternatives, never rank by IRR alone; use incremental analysis or compute PW/AW directly at the MARR. With unequal lives, use Annual Worth or a common study period with a salvage value - not a raw PW comparison. Sunk costs are irrelevant to the decision. Depreciation is not a cash flow, but it shields taxable income.
Taxes and inflation
After-tax cash flow = (revenue − expenses − depreciation)(1 − t) + depreciation. Fisher relationship: (1 + i_nominal) = (1 + i_real)(1 + inflation rate). Use market dollars with a market MARR, or constant dollars with a real MARR - never mix the two.
Traps
Omitting salvage value; using book value where market value is required; treating loan principal received as income; computing payback when cash flows change sign more than once; comparing lease to purchase without the tax shield.
Worked example
PW of $10,000 per year for 5 years at 10%: (P/A, 10%, 5) = 3.7908, so PW = $37,908. If the asset costs $40,000, the project loses value at a 10% MARR and should be rejected.