Computing Cash Flows
Installing new machinery is useful and can bring about favorable circumstances as long as it performs its function. In these conditions, such alternatives are perceived as cash receipts or disbursements at different periods in time. Earlier cash flows are more valuable than the late ones, so we cannot add them together. Thus, each option results in a set of cash flows. Therefore, the technics that are applicable to comparing the value of money are the basis of engineering economic analysis.
Time Value of Money
Monetary consequences of any option occur within a substantial period, whether it takes a year or more. Money is a valuable asset, so people are ready to pay to have money available for usage, and the charge is called interest. The time value of money is conditioned by the willingness of different banks, organizations, or people to pay interest for various amounts of money.
Simple interest
Simple interest is computed only on the original sum, not on charged interest. Normally, within the simple interest, the amount earned or due in one period does not influence the principal for interest calculations.
Compound interest
The distinction between the compound and simple interest is that the former collects previous interest on top of current interest. Compound interest is more applicable in comparison to the simple one.
Equivalence
Whether a person has money now or has the assurance of getting some other amount of money later, meaning that the present amount is equivalent to a future sum at a specified interest rate. Equivalence is directly dependent on the interest rate because changing the interest rate ruins the equivalence between payments. There are different formulas for calculating the nominal or effective interest rate and single payment interest.