Map of content for engineering economics — analyzing the economic implications of engineering decisions, plus the business and strategy context engineers work inside. The path: cost concepts → cost estimation → time value of money → cash flow analysis → comparison methods → inflation → depreciation → taxes → replacement decisions → risk and uncertainty → opportunities and feasibility → financial statements → business planning → strategic management.
Cost concepts
The vocabulary of cost — how accountants and engineers slice up “what something costs.”
- Total cost — the sum of fixed and variable; the basic decomposition.
- Fixed cost — independent of output (rent, salaries).
- Variable cost — scales with output (materials, hourly labour).
- Direct cost — traceable to a specific product or project.
- Indirect cost — overhead spread across products.
- Incremental cost — extra cost of one more unit or one more option.
- Sunk cost — already spent; irrelevant to future decisions.
- Opportunity cost — the value of the best forgone alternative.
- Life-cycle cost — cradle-to-grave total: design, acquisition, operation, disposal.
- Cash cost vs book cost — money actually moving versus accounting entries.
- Supply and demand — the market context that sets prices.
Cost estimation
Predicting what something will cost before it exists.
- Cost estimate classes — order-of-magnitude through detailed; accuracy vs effort.
- Cost index — adjusting historical costs for inflation (CPI, ENR, Marshall & Swift).
- Unit cost estimation — cost per unit times quantity.
- Parametric cost estimation — cost as a function of one or more design parameters.
- Power-sizing model — economies of scale: .
- Learning curve model — unit cost drops by a fixed fraction each doubling of cumulative output.
Time value of money
A dollar today is worth more than a dollar later. The factors that make cash flows at different points in time commensurable.
- Time value of money — the foundational principle.
- Interest (engineering economics) — the rental price of money.
- Simple interest — interest on the principal only; rare in practice.
- Compound interest — interest on interest; the default model.
- Nominal vs effective interest rate — quoted rate vs the rate you actually pay.
- Equivalence (engineering economics) — when two cash flows are economically the same.
- Compound interest factor — overview of the standard , , etc. factors.
Cash flow analysis
Drawing the cash flows and applying the factors.
- Cash flow diagram — the timeline-plus-arrows notation for problem setup.
- Annuity (engineering economics) — a uniform series of payments.
- Sinking fund factor — , the periodic deposit to accumulate a future sum.
- Capital recovery factor — , the periodic payment to amortize a present sum.
- Series present worth factor — , present value of a uniform series.
- Uniform series compound amount factor — , future value of a uniform series.
- Arithmetic gradient series — cash flows that grow by a constant amount each period.
- Geometric gradient series — cash flows that grow by a constant rate each period.
Comparison methods
Choosing between competing projects on a common economic footing.
- Minimum acceptable rate of return — the MARR, the hurdle every project must clear.
- Independent vs mutually exclusive projects — the structure that determines which method applies.
- Comparison of alternatives — the general framework.
- Present worth method — discount everything to and pick the best PW.
- Future worth method — push everything to the horizon; same ranking as PW.
- Annual worth method — convert to equivalent uniform annual cost.
- Repeated lives approach — equalize project lifetimes by replication.
- Study period approach — equalize lifetimes by truncation with salvage.
- Payback period — how long until cumulative net cash turns positive; ignores TVM.
- Internal rate of return — the discount rate that zeroes the present worth.
- External rate of return — IRR’s fix for cash flows with sign changes.
Inflation
Cash flows expressed in dollars whose value is itself changing.
- Inflation — the general rise in the price level over time.
- Real interest rate — interest after stripping out inflation; the Fisher relation.
Depreciation
How an asset’s accounting value drops as it ages.
- Depreciation — the general concept.
- Straight-line depreciation — equal drop each year.
- Declining balance depreciation — fixed-percentage drop on the current book value.
- Market value vs book value — what an asset sells for vs what the books say it’s worth.
Taxes
Why after-tax cash flow is the only cash flow that matters.
- Corporate income tax — the basic mechanics of business taxation.
- Capital cost allowance — the Canadian tax-depreciation system.
- Undepreciated capital cost — the running CCA tax balance.
- Half-year rule — only half the CCA in year of acquisition or disposal.
- Capital tax factor — closed-form CTF for the present-worth tax savings from CCA.
- Capital salvage factor — CSF for the tax effect of salvage value.
- After-tax MARR — the discount rate to use after taxes.
Replacement decisions
When to keep the defender vs buy the challenger.
- Replacement decision — the general problem.
- Economic life — the service life that minimizes equivalent annual cost.
- Equivalent annual cost — the EAC, the metric for replacement comparisons.
- One-year principle — under common conditions, just compare next year’s defender cost to challenger EAC.
Risk and uncertainty
Decisions when the future isn’t a single number.
- Risk and uncertainty — the distinction (knowable vs unknowable probabilities) and the framing.
- Sensitivity analysis — how the answer moves when an input moves.
- Break-even analysis — the input value that flips the decision.
- Decision tree — branching diagram for sequential probabilistic choices.
- Expected value (engineering economics) — probability-weighted average outcome.
- Risk management — the four-step identify-assess-respond-monitor process.
Opportunities and feasibility
Where projects come from, and how to screen them.
- Entrepreneur — starts a venture from outside an existing organization.
- Intrapreneur — drives new ventures from inside one.
- Business opportunity — the unmet need plus the ability to meet it profitably.
- Idea generation process — divergent then convergent screening of candidate ideas.
- Feasibility analysis — product/service, industry/market, organizational, financial.
Financial statements
The three statements that summarize a firm’s financial state.
- Financial management — the function and its tools.
- Income statement — revenues minus expenses over a period; “did we make money?”
- Balance sheet — assets, liabilities, equity at a point in time; “what do we own and owe?”
- Statement of cash flows — operating, investing, financing cash movement.
- Pro forma financial statements — projected statements for planning and pitches.
- Financial ratio analysis — liquidity, leverage, profitability, efficiency ratios.
- Assessing financial strength — putting the ratios together to judge a firm.
Business planning
The document that ties strategy, operations, and finance together.
- Business plan — the standard document: executive summary through financials.
- Management process — plan, organize, lead, control.
Strategic management
Setting and adapting the long-term direction.
- Strategic management — the process of formulating and executing strategy.
- SWOT analysis — strengths, weaknesses, opportunities, threats.
- Levels of strategy — corporate, business, functional.
- Organizational culture — the shared values and norms that constrain execution.
- Change management — moving an organization from current state to target state.
Connects to Differential equations — Compound interest is the simplest exponential ODE, , structurally identical to the Malthusian model. Also connects to Data science for the probabilistic side: Expected value (engineering economics) and decision tree here are the same idea as expectations and tree-based decisions there, applied to monetary outcomes rather than predictions.