The most important thing no one discusses in engineering!

Greg L. Turnquist
5 min readFeb 7, 2024

During my senior year of computer engineering at Auburn University I had I take this one quarter course (yes, AU was on the quarter system back then).

It was almost nothing. And yet…it’s everything.

I studied Engineering Economics, and something that only took me nine weeks of study, its concepts and equations are something I reach for all the time, both in work and in life.

The name of the course and the corresponding textbook doesn’t do the subject justice, You see this is the class where I was introduced to TVM, the Time Value of Money.

The bedrock concept is that any payment has a present value (PV) as well as a future value (FV). For example, if you had:

  • $100 today.
  • You were to put it in a bank account with a 7.2% yield.
  • According to the equation FV=PV*(1+i)^n, it’s value in 10 years would be $200.

Where TVM begins to sizzle is when you take this simple equation and then dream up bigger scenarios.

Imagine 10 consecutive cash flow payments where each year you put $100 into that same bank (7.2% annual interest). The first payment has 10 years to grow, just like before. Now if we’re talking about figuring out the value of things in ten years, like the previous example, then the second payment of $100 only has nine years to grow. The third payment will only have eight years. Rinse. Repeat.

Using the equation above, you can grind through all ten cash flows. I realize that’s a chore, so I’ll go ahead and derive the sum future value for you as $1394.

On top of that, using the very same equation, you can handily equate this to a present value of $695. (We sometimes describe this as net present value, implying a sum of cash flows valued in present-day dollars)

--

--

Greg L. Turnquist

Sr. Staff Technical Content Engineer at CockroachDB • YouTube Content Creator at https://youtube.com/@ProCoderIO • Best-Selling Author • Coffee Lover