This document synthesizes the core principles of Engineering Economic Analysis as outlined in the provided source text. The central purpose of this field is to equip engineers with the tools to make rational, data-driven decisions on economic problems of intermediate and complex scope. The methodology is built upon a structured, nine-step decision-making process that emphasizes the identification of feasible alternatives and the selection of an appropriate economic criterion—typically maximizing benefits, minimizing costs, or maximizing net profit.

A foundational concept is the time value of money, which posits that money has earning power over time, measured by an interest rate. This principle necessitates the use of equivalence, a technique that employs compound interest formulas to convert disparate cash flows occurring at different times into a comparable format. The primary analysis methods derived from this concept include Present Worth (PW) Analysis, Annual Cash Flow (AC) Analysis, and Rate of Return (IRR) Analysis. For comparing multiple mutually exclusive alternatives, Incremental Analysis is essential.

The analysis is further refined by incorporating real-world complexities. These include a detailed understanding of various cost structures (fixed, variable, sunk, opportunity, life-cycle), sophisticated cost estimating models (cost indexes, power-sizing, learning curves), and robust methods for handling uncertainty and risk (probability distributions, expected value, decision trees, simulation). Furthermore, the text details the critical impact of depreciation (notably the MACRS system) on after-tax cash flows and provides frameworks for adjusting analyses for inflation by distinguishing between actual and real dollars. Specialized applications such as Replacement Analysis (challenger vs. defender), Public Sector Analysis (using Benefit-Cost Ratios), and Capital Rationing are also comprehensively covered. The modern approach emphasizes the use of spreadsheets to model and solve these complex, realistic cash-flow scenarios.