Engineering Economics

FE Exam Prep Course

© Kaplan, Inc. © Kaplan, Inc.

ENGINEERING ECONOMICS
Lesson Overview
Engineering Economics • Book Value
• Introduction • Equivalent Uniform Annual Cost
• Year-End and Other Conventions • Capitalized Cost
• Cash Flow • Inflation
• Time Value of Money • Capital Budgeting (Alternative
• Discount Factors Comparisons)
• Functional Notation • Break-Even Analysis
• Single Payment Equivalence • Benefit-Cost Analysis
• Uniform Series Equivalence • Sensitivity Analysis, Risk Analysis, and
• Uniform Gradient Equivalence Uncertainty Analysis
• Nonannual Compounding • Accounting Principles
• Depreciation • Accounting Costs and Expense Terms

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ENGINEERING ECONOMICS
Learning Objectives
You will learn
• about accounting principles and • about depreciation
conventions
• how to compare alternative
• about the time value of money investment proposals
• how to using discount factors to • how to perform break-even and
evaluate and compare different kinds benefit-cost analyses
of cash flows
• terms and principles using in
• about annual and nonannual engineering accounting
compounding

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ENGINEERING ECONOMICS
Introduction
engineering economics
• a study of the desirability of making an Differences between alternatives are
investment described in terms of monetary value
over a period of time (effective period).
• a way of choosing among a number of
proposed courses of action Any monetary unit (dollars, yen, euros)
and any effective period (month, year,
decade) may be used.

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ENGINEERING ECONOMICS
Year-End and Other Conventions
year-end convention
• the assumption that all receipts and • exceptions are cash flows associated
disbursements take place at the end with t = 0, such as
of the year (or other effective period)
• initial project cost
in which they occur
• trade-in allowance
• greatly simplifies calculations
• doesn’t greatly reduce precision
(typically, other simplifying
assumptions and estimates have
already been made)

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ENGINEERING ECONOMICS
Cash Flow
cash flow cash flow diagram
the sums of money recorded as receipts • a graphic representation of a cash
or disbursements in a project’s financial flow
records
• can be drawn to help visualize and
simplify problems

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ENGINEERING ECONOMICS
Cash Flow
conventions of cash flow diagrams
• Horizontal axis is time, vertical axis is
monetary value.
• Receipts are indicated by up arrows,
expenses by down arrows. cash flow diagram

• Arrows for same effective period are

placed end to end, may be combined.
• Sunk costs (expenses incurred before
t = 0) are disregarded.

simplified

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ENGINEERING ECONOMICS
Cash Flow
compounding period interest rate
either the number of periods during the • per year, i
life of the asset, or the number of periods • effective, ie (when compounded more
per calendar year than annually)
m
 r
payment period ie =+
 1  −1
use the year-end convention  m

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ENGINEERING ECONOMICS
Cash Flow
present worth, P uniform gradient amount, G
present amount at t = 0 amount that increases by G each year,
starting at the end of the second year
future worth, F
and stopping at the end of year n
future amount at t = n that is equivalent
to a present amount at t = 0
annual amount, A
uniform amount that repeats at the end
of each year for n years

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ENGINEERING ECONOMICS
Time Value of Money
time value of money
Funds placed in a secure investment will For example, if a secure investment with
increase with time. an interest rate of 5% is available, then
$100 today has a value equivalent to
The amount of increase depends on the
$105 a year from now.
time elapsed and the interest rate that
can be obtained. In other words, a present worth, P, of
$100 at t = 0 is equivalent to a future
worth, F, of $105 at t = 1.

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ENGINEERING ECONOMICS
Discount Factors
discount factor
Formulas for converting one kind of cash
flow to another are shown at right.
To save time, tables of conversion
factors, called discount factors, are given
in the NCEES Handbook for many values
of i and n.

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ENGINEERING ECONOMICS
Example: Discount Factors
Most nearly, how much money should be
put into an investment with a 10%
effective annual rate in order to have
$10,000 in five years?
(A) $5600
(B) $6200
(C) $7500
(D) $8100

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ENGINEERING ECONOMICS
Example: Discount Factors
Most nearly, how much money should be Solution
put into an investment with a 10%
The answer wanted is the present worth
effective annual rate in order to have
that is equivalent to a future worth of
$10,000 in five years?
$10,000. The interest rate is 10%, and the
(A) $5600 number of interest periods is 5.
(B) $6200 From a table of discount factors, when i =
10% and n = 5, P/F = 0.6209.
(C) $7500
(D) $8100 = ( P F , 10%, 5)
P F= ( $10, 000 )( 0.6209 )
= $6209 ( $6200 )
The answer is (B).

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ENGINEERING ECONOMICS
Functional Notation
multiplying discount factors
The fractional notation for discount
factors allows them to be interpreted
algebraically, as though they were
fractions of variables. For example,

P  A
P F=
  A G  
F G
 P  F 
F = A   
 A  P 

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ENGINEERING ECONOMICS
Example: Functional Notation
Given an effective interest rate of 10%,
what factor will most nearly convert a
gradient cash flow ending at t = 8 to a
future value?
(A) 0.29
(B) 1.34
(C) 7.48
(D) 34.36

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ENGINEERING ECONOMICS
Example: Functional Notation
Given an effective interest rate of 10%, Solution
what factor will most nearly convert a
The factor wanted is F/G when i = 10%
gradient cash flow ending at t = 8 to a
and n = 8. No F/G factors are given in the
future value?
discount factor tables in the NCEES
(A) 0.29 Handbook, but an F/G factor can be
obtained quickly by multiplying two other
(B) 1.34
factors, such as F/P and P/G or F/A and
(C) 7.48 A/G, that can be found in the tables.
(D) 34.36

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ENGINEERING ECONOMICS
Example: Functional Notation
Given an effective interest rate of 10%, Solution (continued)
what factor will most nearly convert a
gradient cash flow ending at t = 8 to a (F G , 10%, 8 ) = ( F P , 10%, 8 )( P G , 10%, 8 )
future value? = ( 2.1436 )(16.0287 )
(A) 0.29 = 34.3591

(B) 1.34 The answer is (D).

(C) 7.48
(D) 34.36

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ENGINEERING ECONOMICS
Single Payment Equivalence
If the needed discount factor cannot be single payment present worth
found in the tables, the conversion can
Given a future worth of F after n interest
be calculated using the formulas.
periods and an interest rate of i, the
single payment future worth equivalent present worth is
Given a present worth of P and an
interest rate of i, the equivalent future
worth after n interest periods is

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ENGINEERING ECONOMICS
Uniform Series Equivalence
uniform series future worth sinking fund factor
Given an uniform amount of A and an A sinking fund is an account into which
interest rate of i, the equivalent future annual deposits are made in order to
worth after n periods is accumulate a particular amount at a
particular time in the future.
Given a future worth of F after n periods
and an interest rate of i, the equivalent
uniform amount is

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ENGINEERING ECONOMICS
Uniform Series Equivalence
uniform series present worth capital recovery factor
Given a uniform amount of A for n Equivalent annual values are often used
periods and an interest rate of i, the to compare alternative investments that
equivalent present worth is have different lifespans.
Given a present worth of P and an
interest rate of i for a cash flow that will
last n periods, the equivalent uniform
amount is

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ENGINEERING ECONOMICS
Uniform Gradient Equivalence
uniform gradient present worth uniform gradient future worth
Given a cash flow that is increasing by a Given a cash flow that is increasing by a
uniform amount, G, for n – 1 periods and uniform amount, G, and an interest rate
an interest rate of i, the equivalent of i, the equivalent future worth after
present worth is n – 1 periods is

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ENGINEERING ECONOMICS
Uniform Gradient Equivalence
uniform gradient uniform series factor quirks of gradient cash flows
Given a cash flow that is increasing by a • gradient cash flow begins with t = 2
uniform amount, G, for n – 1 periods and (for t = 1, cash flow is zero)
an interest rate of i, the equivalent
• for this reason, number of periods is
uniform amount is
n – 1, not n (n is period number of
final cash flow, however)
• for example, cash flow of $100, $110,
$120, and so on (t = 1, 2, 3, and so on)
is divided into two cash flows with
A = $100 and G = $10
• when expenses increase, G is negative
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ENGINEERING ECONOMICS
Nonannual Compounding
effective annual interest rate
An interest rate that is compounded The effective interest rate per period is
more than once in a year can be
r
converted to an effective annual interest i=
rate, ie, with the following equation. m

• r is the nominal interest rate.

• m is the number of compounding
periods per year.

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ENGINEERING ECONOMICS
Example: Nonannual Compounding
A savings and loan offers a 5.25% rate per
annum compounded daily over 365 days
per year. Most nearly, what is the
effective annual rate?
(A) 5.3%
(B) 5.4%
(C) 5.6%
(D) 5.7%

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ENGINEERING ECONOMICS
Example: Nonannual Compounding
A savings and loan offers a 5.25% rate per Solution
annum compounded daily over 365 days
The nominal interest, r, is 0.0525. The
per year. Most nearly, what is the
number of compounding periods per
effective annual rate?
year, m, is 365.
(A) 5.3% r
m

ie =+
 1  −1
(B) 5.4%  m 
365
(C) 5.6%  0.0525 
= 1 +  −1
 365 
(D) 5.7% = 0.0539 ( 5.4% )

The answer is (B).

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ENGINEERING ECONOMICS
Depreciation
straight line method

In this method, the depreciation, Dj, is

the same each year.
The depreciation basis is the cost, C,
minus the salvage value, Sn.
The depreciation basis is divided equally
over the n years in the depreciation
period.

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ENGINEERING ECONOMICS
Example: Depreciation
An asset is purchased that costs $9000. It
has a 10-year life and a salvage value of
$200. Most nearly, what is the annual
depreciation by the straight line method?
(A) $700
(B) $820
(C) $880
(D) $900

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ENGINEERING ECONOMICS
Example: Depreciation
An asset is purchased that costs $9000. It Solution
has a 10-year life and a salvage value of
Using the straight line method,
$200. Most nearly, what is the annual
depreciation by the straight line method?
C − S n $9000 − $200
Dj
= =
(A) $700 n 10
(B) $820 = $880
(C) $880 The answer is (C).
(D) $900

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ENGINEERING ECONOMICS
Depreciation
Representative MACRS Depreciation Factors
Modified Accelerated Cost Recovery
System (MACRS)

• In this method, the depreciation basis

is divided unequally over the years of
the depreciation period.
• The depreciation, Dj, for year j is
found by multiplying the cost by a
factor taken from a table. Salvage
value is not considered.

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ENGINEERING ECONOMICS
Example: Depreciation
Representative MACRS Depreciation Factors
An asset is purchased that costs $9000. It
has a 10-year life and a salvage value of
$200. Most nearly, what is the
depreciation for the third year by
MACRS?
(A) $900
(B) $1000
(C) $1300
(D) $1600

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ENGINEERING ECONOMICS
Example: Depreciation
An asset is purchased that costs $9000. It Solution
has a 10-year life and a salvage value of
For an asset with a life of 10 years, from
$200. Most nearly, what is the
the MACRS depreciation factor table, the
depreciation for the third year by
third year is 14.40%.
MACRS?
Use MACRS.
(A) $900
(B) $1000 D j = ( factor ) C

(C) $1300 (=
14.40% )( $9000 )
=D3 $1296 ( $1300 )
100%
(D) $1600
The answer is (C).

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ENGINEERING ECONOMICS
Book Value
Book Value with
book value, BV Straight Line and MACRS Methods

• the difference between the original

purchase price and the accumulated
depreciation
• the assumed value of the asset after j
years

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ENGINEERING ECONOMICS
Example: Book Value
An asset is purchased that costs $9000. It
has a 10-year life and a salvage value of
$200. It is being depreciated using the
straight line method. Most nearly, what is
its book value after three years?
(A) $5200
(B) $6400
(C) $6900
(D) $7200

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ENGINEERING ECONOMICS
Example: Book Value
An asset is purchased that costs $9000. It Solution
has a 10-year life and a salvage value of
From the straight line method, the
$200. It is being depreciated using the
depreciation each year is
straight line method. Most nearly, what is
its book value after three years? C − S n $9000 − $200
Dj =
= = $880
n 10
(A) $5200 The book value after three years is
(B) $6400 BV = initial cost − ∑ D j = $9000 − ( 3)( $880 )
(C) $6900 = $6360 ( $6400 )
(D) $7200 The answer is (B).

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ENGINEERING ECONOMICS
Example: Book Value
Representative MACRS Depreciation Factors
An asset is purchased that costs $9000. It
has a 10-year life and a salvage value of
$200. It is being depreciated using
MACRS. Most nearly, what is its book
value after three years?
(A) $5200
(B) $6400
(C) $6900
(D) $7200

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ENGINEERING ECONOMICS
Book Value
An asset is purchased that costs $9000. It Solution
has a 10-year life and a salvage value of
Using MACRS and the depreciation factor
$200. It is being depreciated using
table,
MACRS. Most nearly, what is its book
value after three years?
D j = (factor)C
(A) $5200
=D1
(=
$900
10.00% )( $9000 )
(B) $6400 100%
(C) $6900 =
(18.00% )( $9000 )
D2 = $1620
100%
(D) $7200
=
(14.40% )( $9000 )
D3 = $1296
100%
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ENGINEERING ECONOMICS
Book Value
An asset is purchased that costs $9000. It Solution
has a 10-year life and a salvage value of
Calculate the book value.
$200. It is being depreciated using
MACRS. Most nearly, what is its book =BV initial cost − ∑ D j
value after three years?
= $9000 − $900 − $1620 − $1296
(A) $5200
= $5184 ( $5200 )
(B) $6400
The answer is (A).
(C) $6900
(D) $7200

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ENGINEERING ECONOMICS
Equivalent Uniform Annual Cost
equivalent uniform annual cost (EUAC)
• the annual amount equivalent to sum
of all cash flows in alternative being
considered
• differs in sign from other cash flows
• costs are positive
• receipts are negative

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ENGINEERING ECONOMICS
Capitalized Cost
capitalized cost
• like EUAC, differs in sign from other
cash flows
• costs are positive
• the present worth of a project with an
infinite life • receipts are negative
• the amount of money at t = 0 needed This equation covers only annual costs
to support the project perpetually on such as maintenance. If using this
earned interest only equation to evaluate a potential
investment, initial costs must also be
added.

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ENGINEERING ECONOMICS
Inflation
interest rate adjusted for inflation, d

• used to take inflation into account

when calculating discount factors
• f is constant inflation rate per year

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ENGINEERING ECONOMICS
Example: Inflation
The average inflation rate is 6% and the
effective interest rate is 10%. Most
nearly, what is the uninflated present
worth of $2000 two years from now?
(A) $1500
(B) $1800
(C) $2100
(D) $2400

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ENGINEERING ECONOMICS
Example: Inflation
The average inflation rate is 6% and the Solution
effective interest rate is 10%. Most
Calculate the interest rate adjusted for
nearly, what is the uninflated present
inflation
worth of $2000 two years from now?
d =i + f + ( i × f ) =0.10 + 0.06 + ( 0.10 )( 0.06 )
(A) $1500
= 0.166
(B) $1800 Calculate the equivalent present worth.
Substitute d for i.
(C) $2100
P =F (1 + d ) =( $2000 )(1 + 0.166 )
−n −2

(D) $2400
= $1471 ( $1500 )
The answer is (A).
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ENGINEERING ECONOMICS
Capital Budgeting (Alternative Comparisons)
choosing the best proposal
• Develop ideas and strategies for • Evaluate the proposals.
improving company’s position.
• Get approval from all concerned
• From these ideas and strategies, parties.
develop realistic, cost-effective
proposals. • Implement the project.

• Gather relevant information and data

on proposals.

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ENGINEERING ECONOMICS
Capital Budgeting (Alternative Comparisons)
There are a number of methods of
comparing alternative proposals and
finding the one that is economically
superior. Some common ones are
• present worth analysis
• annual cost analysis
• capitalized cost analysis
• rate of return analysis

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ENGINEERING ECONOMICS
Capital Budgeting (Alternative Comparisons)
present worth analysis
used when alternatives The best alternative economically is the
one with the greatest present worth.
• accomplish the same things
(do the same job)
• have the same lifespan

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ENGINEERING ECONOMICS
Example: Capital Budgeting
Investment A will cost $10,000 today and
pay back $12,500 three years from now.
Investment B will cost $10,000 today and
pay back $4000 each year for three years.
Using an effective interest rate of 4% for
comparison, which investment is
superior?

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ENGINEERING ECONOMICS
Example: Capital Budgeting
Investment A will cost $10,000 today and Solution
pay back $12,500 three years from now.
Compare present worths.
Investment B will cost $10,000 today and
pay back $4000 each year for three years. −Cinitial + F ( P F , 4%, 3)
PA =
Using an effective interest rate of 4% for
−$10, 000 + ( $12,500 )( 0.8890 )
=
comparison, which investment is
= $1112.50
superior?
−Cinitial + A ( P A , 4%, 3)
PB =
−$10, 000 + ( $4, 000 )( 2.7751)
=
= $1100.40

Investment A is superior.

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ENGINEERING ECONOMICS
Capital Budgeting (Alternative Comparisons)
annual cost analysis
• used when alternatives Each alternative is assumed to be
repeatedly renewed up to the duration of
• accomplish the same things the longest-lived alternative.
(do the same job)
The best alternative economically is the
• have different lifespans one with the greatest annual worth.
• also called annual return method or
capital recovery method
• calculated cost is called equivalent
uniform annual cost (EUAC) or
equivalent annual cost (EAC)

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ENGINEERING ECONOMICS
Capital Budgeting (Alternative Comparisons)
Two alternatives are being considered.
alternative A B
type brick wood
life 30 yr 9 yr
initial cost $1500 $650
maintenance $5/yr $20/yr
The interest rate is 8%. Which alternative
is superior?

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ENGINEERING ECONOMICS
Capital Budgeting (Alternative Comparisons)
Two alternatives are being considered. Solution
alternative A B Calculate the equivalent uniform annual
type brick wood cost of each project.
life 30 yr 9 yr = EUACA Pinitial cost ( A P , 8%, 30 ) + Amaintenance
initial cost $1500 $650 = ( $1500 )( 0.0888 ) + $5
maintenance $5/yr $20/yr
= $138.20
The interest rate is 8%. Which alternative
= EUACB Pinitial cost ( A P , 8%, 9 ) + Amaintenance
is superior? = ( $650 )( 0.1601) + $20
= $124.07
Alternative B has the lower EUAC and so
is superior.

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ENGINEERING ECONOMICS
Capital Budgeting (Alternative Comparisons)
capitalized cost analysis
• used when alternatives Calculate the capitalized cost (P) for each
alternative. Add initial costs to this.
• accomplish the same things
(do the same job) The best alternative economically is the
one with the lowest capitalized cost.
• have infinite lifespans with steady
annual expenses

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ENGINEERING ECONOMICS
Example: Capital Budgeting
A public works project will cost
$25,000,000 now and require $2,000,000
in maintenance annually. The effective
annual interest rate is 12%. Most nearly,
what is the total capitalized cost of the
project?
(A) $42,000,000
(B) $45,000,000
(C) $49,000,000
(D) $52,000,000

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ENGINEERING ECONOMICS
Example: Capital Budgeting
A public works project will cost Solution
$25,000,000 now and require $2,000,000
Calculate the capitalized cost. The total
in maintenance annually. The effective
capitalized cost is
annual interest rate is 12%. Most nearly,
what is the total capitalized cost of the A
Ctotal =
Cinitial + Ccapitalized =
Cinitial +
project? i
$2, 000, 000
(A) $42,000,000 = $25, 000, 000 +
0.12
(B) $45,000,000 = $41, 666, 667 ( $42, 000, 000 )
(C) $49,000,000
The answer is (A).
(D) $52,000,000

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ENGINEERING ECONOMICS
Capital Budgeting (Alternative Comparisons)
rate of return analysis rate of return (ROR)
used when it is not clear what effective • effective annual rate at which
interest rate, i, to use in economic investment accrues income
analysis
• equal to interest rate that would make
present worth of investment equal to
zero
• must exceed minimum attractive rate
of return (MARR)
• also called return on investment (ROI)

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ENGINEERING ECONOMICS
Capital Budgeting (Alternative Comparisons)
rate of return analysis (continued)
to choose between two alternatives: If ROR for this third cash flow also
exceeds MARR, then alternative with
• check that ROR for each alternative higher initial cost is superior.
exceeds MARR (if not, no need to
continue) (Or, calculate present worth of third cash
flow using i = MARR. If present worth is
• for each year starting with t = 0, zero or positive, larger investment is
subtract cash flow for alternative with superior.)
lower initial cost from cash flow for
alternative with higher initial cost, in
effect creating third cash flow
• check that ROR for this cash flow
exceeds MARR
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ENGINEERING ECONOMICS
Break-Even Analysis
break-even analysis pay-back period (PBP)
analysis with the goal of finding length of time need for cumulative net
• the point at which revenue is equal to profit to equal initial investment
cost, or
• the point at which two alternatives are
equal

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ENGINEERING ECONOMICS
Break-Even Analysis
Leasing a car costs $0.15/km. Buying a
car has an initial cost of $5000, with
additional costs of $500/yr for insurance
and $0.04/km for gas and oil. The car will
have a 3 yr life and a salvage value of
$1200. An effective interest rate of 10% is
assumed. Most nearly, for what number
of kilometers driven per year will leasing
and buying have the same cost?
(A) 16,000 km (B) 20,000 km
(C) 23,000 km (D) 27,000 km

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ENGINEERING ECONOMICS
Break-Even Analysis
Leasing a car costs $0.15/km. Buying a Solution
car has an initial cost of $5000, with If x is number of kilometers driven, then
additional costs of $500/yr for insurance
 $0.15 
and $0.04/km for gas and oil. The car will EUAClease =  x
 km 
have a 3 yr life and a salvage value of
 $0.04 
$1200. An effective interest rate of 10% is EUAC=buy   x + $500 + ( $5000 )( A P , 10%, 3)
 km 
assumed. Most nearly, for what number
− ( $1200 )( A F , 10%, 3)
of kilometers driven per year will leasing
and buying have the same cost?  $0.04 
=   x + $500 + ( $5000 )( 0.4021)
 km 
(A) 16,000 km (B) 20,000 km
− ( $1200 )( 0.3021)
(C) 23,000 km (D) 27,000 km = ( $0.04 ) x + $2148

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ENGINEERING ECONOMICS
Break-Even Analysis
Leasing a car costs $0.15/km. Buying a Solution (continued)
car has an initial cost of $5000, with
Find the value of x that makes the costs
additional costs of $500/yr for insurance
equal.
and $0.04/km for gas and oil. The car will
have a 3 yr life and a salvage value of  $0.15 
EUAClease =  x
$1200. An effective interest rate of 10% is  km 
assumed. Most nearly, for what number  $0.04 
EUAC
=   x + $2148
of kilometers driven per year will leasing buy
 km 
and buying have the same cost? $2148
= x = 19,527 km ( 20, 000 km )
(A) 16,000 km (B) 20,000 km $0.11
(C) 23,000 km (D) 27,000 km km
The answer is (B).
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ENGINEERING ECONOMICS
Benefit-Cost Analysis
benefit-cost analysis
• often used where benefits and costs Disbursements by initiators of the project
affect different groups are considered costs and are added to C,
while costs borne by users of the project
• B is present worth of all benefits are called disbenefits and subtracted
(regardless of who benefits) from B.
• C is present worth of all costs
(regardless of who pays them)
A project is considered acceptable if

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Example: Benefit-Cost Analysis
For a proposed municipal project, the
initial cost is $40,000,000, the capitalized
perpetual annual cost is $12,000,000, the
capitalized benefit is $49,000,000, and
the residual value is zero. Should the
project be undertaken?

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ENGINEERING ECONOMICS
Example: Benefit-Cost Analysis
For a proposed municipal project, the Solution
initial cost is $40,000,000, the capitalized B = $49, 000, 000
perpetual annual cost is $12,000,000, the
= C $40, 000, 000 + $12, 000, 000
capitalized benefit is $49,000,000, and
the residual value is zero. Should the = $52, 000, 000
project be undertaken? B − C < $0
The project should not be undertaken.

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ENGINEERING ECONOMICS
Sensitivity, Risk, and Uncertainty Analysis
sensitivity risk
the degree to which an economic the chance that the return of an
decision would be affected by moderate investment will be less than what is
changes in estimates and forecasts expected

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Accounting Principles
financial accounting independent projects
• financial statements • projects for which the selection of one
• annual reports does not affect the selection of others

• other reports for those concerned mutually exclusive projects

with the operation of a firm • projects of which only one can be
managerial accounting selected

• data and other information needed to contingent project

make rational decisions for the firm • a project that cannot go forward
unless another project is approved

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ENGINEERING ECONOMICS
Accounting Costs and Expense Terms
operating and maintenance (O&M) costs:
costs incurred due to running equipment
general, selling, and administrative
(GS&A) expenses: costs associated with
operating a business
direct labor costs: costs incurred in the
factory, such as assembly, machining, and
painting labor costs
direct material costs: the costs of all
materials that go into production
prime cost: sum of direct labor and direct
material costs
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Learning Objectives
You have learned
• about accounting principles and • about depreciation
conventions
• how to compare alternative
• about the time value of money investment proposals
• how to using discount factors to • how to perform break-even and
evaluate and compare different kinds benefit-cost analyses
of cash flows
• terms and principles using in
• about annual and nonannual engineering accounting
compounding

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Lesson Overview
Engineering Economics • Book Value
• Introduction • Equivalent Uniform Annual Cost
• Year-End and Other Conventions • Capitalized Cost
• Cash Flow • Inflation
• Time Value of Money • Capital Budgeting (Alternative
• Discount Factors Comparisons)
• Functional Notation • Break-Even Analysis
• Single Payment Equivalence • Benefit-Cost Analysis
• Uniform Series Equivalence • Sensitivity Analysis, Risk Analysis, and
• Uniform Gradient Equivalence Uncertainty Analysis
• Nonannual Compounding • Accounting Principles
• Depreciation • Accounting Costs and Expense Terms

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