Cost Engineering Takehome

Engineering economic analysis is a technique that assists in the solution of substantial engineering problems where economic aspects dominate over a considerable period of time.

Equivalence

An essential concept in engineering economic analysis is that of equivalence or the ability to compare cash flows at different points in time.  Equivalence is based on the time value of money, and the cardinal rule is that two cash flows or alternatives only can be compared at a common interest rate.

For example, if a person is indifferent to the acceptance of $110 one year from now in lieu of $100 today, we can say that the two sums of money are equivalent at an interest rate of 10 percent. If however, the interest rate is something greater than 10 percent, we can no longer say the sums are equivalent amd would thus prefer the $100 today.