Engineering Economics and Project Finance
Engineering Economics and Project Finance
This domain tests whether you can compare alternatives on a consistent economic basis and choose the one that adds value for the owner.
Core rules and concepts
- Money has a time value. Compare alternatives at the same point in time using the minimum attractive rate of return (MARR).
- Net present value discounts all cash flows to time zero; accept when NPV is positive. Internal rate of return is the discount rate at which NPV equals zero; compare it with MARR, and expect multiple roots when cash-flow signs alternate.
- Payback ignores cash flow after the cut-off and ignores time value unless discounted.
- Depreciation is a book and tax concept, not a cash flow. Use the correct method and asset life.
- For mutually exclusive options, use incremental analysis; never rank by IRR alone when scale differs.
- Life-cycle costing includes capital, energy, operations, maintenance, salvage, and disposal.
- Financing structures (P3/PPP, power purchase agreements, design-build-finance) shift risk; their value depends on the risk actually transferred and the discount rate used.
Worked example
Choose between two pumps at an 8% MARR over 10 years; the annuity factor is 6.710 and the single-payment factor is 0.4632. Option A: capital $120,000, energy $18,000/yr, salvage $10,000. Option B: capital $80,000, energy $26,000/yr, salvage $5,000. A = 120,000 + (18,000 x 6.710) - (10,000 x 0.4632) = $236,148. B = 80,000 + (26,000 x 6.710) - (5,000 x 0.4632) = $252,144. A wins despite higher capital, because its operating savings outweigh the extra first cost.
Traps
Comparing annual costs with capital costs directly; ranking mutually exclusive projects by IRR; omitting salvage and disposal; treating depreciation as cash; using a discount rate that is not the owner's MARR.