Engineering Economics
Engineering economics compares the costs and benefits of alternatives over time. The central idea is the time value of money: a dollar today is worth more than a dollar in the future.
Time Value of Money
The single-payment compound-amount factor gives future worth F = P(1 + i)^n; its inverse gives present worth P = F/(1 + i)^n. Moving cash flows to a common point in time is required before any fair comparison.
Cost and Economic Analysis
Break-even analysis finds the point where costs equal revenues; benefit-cost ratios and rate of return rank projects. Sunk costs are ignored because they cannot be changed by a current decision.
Comparing Alternatives
Alternatives with unequal lives are compared using equivalent annual worth or a common study period. Depreciation, discounted cash flow, and decision trees handle taxes, salvage value, and uncertainty.