Economics

When we talk about moving money from a point to another point in time, we are talking about economics. Of course there is the value of money now and then, the concept of inflation and other related concepts. Therefore, to understand the value of money in different times, interest rate is used. For example, you borrow some money and you want to pay it back in 2 years, or maybe in 5 years; how much do you need to pay in order to match the same value of the money you borrowed in a later time. using interest rate for various years the new value of the pay-back money can be determined. That's all about economics. 

For the case of borrowing and paying back the money, usually the question is if you borrow x dollars today and if there is an interest rate of i % each year, how much do you have to pay back after n years. It is calculated as:

Future value (F) = Present value (P) × ( 1 + i )n 

In the equation above, we see that the future value (F) is presented as the presented value times a factor [(1+i)n]. There is another way to calculate the future value by finding this factor from a table and multiply it to the present value (p): 

F = P × (F/P, i, n)

The (F/P, i, n) is the factor that should be found from the given table. These tables are given for different interest rates and number of compound periods (for example years). They can also be used to calculating different parameters. For example, for the case presented above, we look at the value in the table based on the F/P and if we want to calculate P from F, then we will look at the P/F value to find the multiplying factor; In the later case, our equation would be P = F × (P/F, i, n). This is approach to use any parameter using the compound interest tables. Here is a link that has the tables for different interest rates and compound periods (accessed on 5/11/2015).

Another parameter of interest in economics is the Annuity or the Annual amount (A). Another parameter of interest is called Gradient (G). Similar to the above, each one of these parameters can be converted to the other ones and the rule still holds following the same compound interest tables:

A = P × (A/P, i, n)

or

G = A × (G/A, i, n) = A / (A/G, i, n)

or

F = G × (F/G, i, n) = G × (F/A, i, n)(A/G, i, n) 

Yes! sometimes, you may not have the required factor given in the table which makes it a little tricky, but there is still a counter trick that can be done to solve the issue using the tables.

Now let's learn a bit about the following topics:

• Cash flow and Equivalence

  • Depreciation

  • Comparison of alternatives

And by the way, here is a page that might be useful for learning and practice of engineering economics (accessed 05/19/2015).