Engineering Economics Analysis (Part 1 of 2)

Explore the time value of money, showing how present value, future value, and opportunity costs help compare multi-year cash flows and determine optimal options.

Represent cash inflows and outflows on a cash flow diagram along a yearly time line, assuming end-of-period amounts; add only same-time flows, and include initial cost and salvage value.

Explain interest and the interest rate, define principal and final amounts, and illustrate the time value of money with simple bank examples, such as 1000 at 10 percent per year.

The lecture compares simple interest and compound interest, showing how principal grows under each method and providing formulas, time value of money concepts, and practical guidance for economic analysis.

Explore how economic equivalence links cash flows via time value of money. Identify single, uniform, irregular, arithmetic gradient, and geometric gradient cash flows and how interest rates establish equivalence.

This lecture covers single cash flows using compounding and discounting factors to convert between present and future values, via f = p(1+i)^n and p = f/(1+i)^n.

Study uniform (equal) series cash flows and four equivalence factors—uniform series compounding amount, sinking fund, uniform series discounting amount, and capital recovery—and convert present and future values.

Explore uneven (irregular) cash flows and learn to determine their future value, present value, and the equivalent uniform amount using compounding and discounting at given rates.

Explore arithmetic (linear) gradient cash flows, including increasing and decreasing cases, decompose into uniform plus gradient parts, and compute present worth, future worth, and equivalent annual amounts.

Explore geometric gradient series cash flows, where amounts grow or shrink by a constant percentage, and apply value methods for i not equal to g and i equal to g.

Learn how composite cash flows combine uniform, gradient, and irregular payments to compute present value, future value, and equivalent amounts at a 14 percent interest rate.

Explore money management concepts in engineering economics, including multiple compounding periods, nominal versus effective interest rates, changing rates, and inflation, plus amortized loans, add-on loans, and customized loans.

Explore the concept of multiple compounding periods, comparing annual and quarterly compounding, and compute future value adjustments; distinguish nominal and effective interest rates as a basis for comparing cash flows.

Compare nominal rates (APR) with the effective rate to understand true annual returns, and learn how compounding frequency shapes analysis across transaction periods.

Explore determining the effective annual rate from a nominal rate when transaction and compounding periods differ, using approach 1 or 2 for cash flows, quarterly or monthly.

Develops approach three for calculating the effective interest rate per transaction period when transaction and compounding periods differ, using nominal rates and uniform deposits to project balances.

Explore continuous compounding in engineering economics, comparing nominal and effective interest rates, and applying Euler’s e to compute effective annual rates and future values.

Explore four approaches to nominal and effective interest rates and learn when to apply each, including continuous compounding and cases with differing transaction and compounding periods.

Explore how changing interest rates across timeframes affect engineering economy calculations, using step-by-step compounding, nominal versus effective rates, and equivalent uniform series.

Explore amortized loans in engineering economics by learning how equal payments allocate interest and principal, track remaining balances, and compare tabular, remaining balance, and equivalent worth methods.

Explore add-on loans, where total interest is calculated on the principal and added to it, then repaid in equal installments. Compare with amortized loans.

Explore customized loan cases (case x, case y, case z): equal end-of-period principal with interest on the unpaid balance, interest-only until maturity, or end-of-period payments for a 5-year 8% loan.

Explore inflation's impact on purchasing power, CPI and base-year measurement, and the distinction between real versus actual dollars and market versus real interest rates for engineering economics.

Analyze project cash flow to determine economic feasibility by evaluating initial investment, annual net cash flow, and related benefits and costs.

Explore investment worth measurement methods: payback period as initial screening, and equivalence methods—net present worth, net future worth, net annual worth, plus internal and external rate of return.

Explore the payback period method as a pre-feasibility screening tool that estimates how long to recover the initial investment, comparing simple and discounted paybacks while highlighting time value of money.

The net present worth method discounts all cash inflows and outflows to the present time, using the minimum attractive rate of return to judge feasibility and select profitable investments.

Apply the net future worth method to determine an investment’s future value by compounding cash inflows and outflows to a date, indicating feasibility via the minimum attractive rate of return.

Apply the net annual worth method to convert cash flows into a uniform annual amount and compare it with net future worth and net present worth to judge investment feasibility.

Classify investments as simple or not simple by cash-flow sign changes, then determine the internal rate of return (IRR) to assess feasibility against the minimum attractive rate of return.

Apply the direct solution method to determine the internal rate of return for simple two-transaction projects. Compare the IRR to the minimum attractive rate of return to judge feasibility.

Apply the trial and error method to estimate the internal rate of return for investments with two or more cash flows over multiple years, using interpolation to refine the IRR.

Compute the internal rate of return using the computer solution method or Excel, solving present value equations for cash flows and comparing to the minimum attractive rate of return.

Non-simple investments can yield multiple internal rates of return, such as 10%, 15%, and 20%, so use external rate of return or alternatives like present value and annual equivalent.

Examine limitations of the internal rate of return for non-simple investments and interim cash flows; learn how the modified internal rate of return, or external rate of return, addresses them.

Explore the external rate of return method, reinvesting positives at the minimum attractive rate and discounting negatives at the safe finance rate to assess project feasibility.

Apply saving/investment ratio method to compare benefits to costs using present, future, annual equivalents discounted at minimum attractive rate of return; above one feasible, below one infeasible, equals one indifferent.

Learn the capitalized equivalent method for public projects with infinite life, deriving the capitalized worth from perpetual annual income and a given interest rate.

Identify independent and dependent projects, distinguish mutually exclusive and contingent investments, highlight the do nothing alternative, and evaluate alternatives separately.

Compare independent projects by present value, future value, and internal rate of return to decide acceptance. For mutually exclusive projects, apply ranking or incremental approaches to revenue or service alternatives.

Explore ranking approach to compare revenue and service alternatives using present, future, or annual equivalents under minimum attractive rate of return, highlighting time value and when to use incremental methods.

Apply the incremental approach to select the best alternative by ordering investments by initial cost, tabulating cash flows, and comparing consecutive options using present, future, annual equivalents, and IRR.

Compare alternatives using the same selection criteria, same minimum attractive rate of return, and equal analysis periods; understand analysis period versus useful life and how to equalize time spans.

Equalize time spans for alternatives with different useful lives using either the least common multiple or study period approach, then compare with present equivalent or equivalent uniform annual cost.