It is common when comparing alternative engineering strategies that have a lifetime of several years to calculate the present net value. This approach is also known as discounted cash-flow analysis. This approach recognises that income due sometime in the future is not as valuable as income now. The discount rate expresses this as a percentage change per year.

Most projects involve the investment of risk funds (equity), the borrowing of money secured by future income or capital (loan funds), secured by the assets created in the project. Money is expended constructing the plant and then expenses are incurred in operating the plant. Revenue is generated by selling the product produced by the plant.

The concept of present net value recognises that income due sometime in the future is not as valuable as income now. This occurs because income received now can be invested to earn additional income in the future. Thus income is devalued by the discount rate. If the discount rate is X% pa then US$100 in one year is worth 100(1 − X/100) today. Income of $1, n years in the future, has a present value of (1 − X/100)n.

A similar approach can be applied to expense. An expenditure of $1, n years in the future, has a present cost of (1 − X/100)n.

Capital has a cost in terms of the borrowing interest rate. Say this is Y% per year. Then 100 US dollars borrowed for n years costs 100(Y/100)n.