Cash Flow

Cash Flow- expenses and receipts

Engineering projects generally have economic

consequences that occur over an extended period of
time
For example, if an expensive piece of machinery is
installed in a plant were brought on credit, the
simple process of paying for it may take several
years
Each project is described as cash receipts or expenses
at different points in time

Categories of Cash Flows

The expenses and receipts due to engineering

projects usually fall into one of the following
categories:

First cost: expense to build or to buy and install

Operations and maintenance (O&M): annual expense,
such as electricity, labor, and minor repairs
Salvage value: receipt at project termination for sale or
transfer of the equipment (can be a salvage cost)
Revenues: annual receipts due to sale of products or
services
Overhaul: major capital expenditure that occurs during
the assets life
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Examples of Cash Inflows & Outflows

Receipts from customers--operating

activity
Loans made to other firms--investing
activity
Dividend payments--financing activity
Payments to investing activity
Payments of taxes--operating activity

Slide 14.8

Types of Cash Flows

Single cash flow
Uniform series
Linear gradient series
Geometric gradient series
Irregular series

Cash Flow Diagrams

The costs and benefits of engineering

projects over time are summarized on a

cash flow diagram.
Cash flow diagram illustrates the size,
sign, and timing of individual cash
flows, and forms the basis for
engineering economic analysis
Tool! To show expenses and receipts
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Cash Flow Diagrams

Pictorial representation of

engineering economic problem

incomes and expenditures
time period
interest rate

Cash Flow diagrams--How

A cash flow diagram

is created by first
drawing a segmented time-based
horizontal line, divided into appropriate
time unit. Each time when there is a
cash flow, a vertical arrow is added
pointing down for costs and up for
revenues or benefits. The cost flows are
drawn to relative scale

Cash Flow Diagrams

P-Pattern
F-Pattern
A-Pattern
G-Pattern

present
future
annual
gradient

Cash Flow Diagrams

$15,000
$2000
$13,000 is net positive cash flow

Positive net Cash flow

(receipts)
1

Time (# of interest periods)

Negative net Cash Flow

(payments)

10

Single Cash Flow

F
Compounding Process

P
Discounting Process

F P(1 i)

P=Present equivalent value

F
(1 i) N

A=Annual equivalent value

F= Future equivalent value

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Example: Value and Interest

The value of money depends on the amount

and when it is received or spent.

Example: What amount must be paid to settle a
current debt of $1000 in two years at an interest
rate of 8% ?
Solution: $1000 (1 + 0.08) (1 + 0.08) = $1166
$1000
1

2
$1166

12

Uneven Payment Series

Find the present worth of any uneven stream of
payments by calculating the present value of each
individual payment and summing the results
Future worth can then be calculated by using the
interest formula
P1
P0
0

P2

P5
P3

P4

P6

F
(1 i) N

Years
13

Equal Payment Series

F
0

2
A

A
F A(1 i)

N 1

N-1

3
A

A(1 i)

N2

......A(1 i) A

F A A(1 i) A(1 i)2 ..... A(1 i) N 1

2
N
(1 i)F A(1 i) A(1 i) .... A(1 i)
Subtracting two above equations from each other yields:

F(1 i) F - A A(1 i)

N
(1 i) 1

FA

14

Linear Gradient Series

(N-1)G

A1

2G
G

Uniform Series

0
1

N-1

(1 i) N iN 1
P G
i 2 (1 i) N

Composite Series: uniform series + linear gradient

Find P, given A1, G, I, N
15

Geometric Gradient Series

Particularly relevant to construction costs
Cash flows increase by a constant %(g); compound
Example:

price changes due to inflation

A1(1+g)N-1

A1

A1(1+g)

2 3
g>0

Present Worth, Pn, of any Cash Flow An

Pn A n (1 i) n A 1 (1 g) n 1 (1 i) n
(1 g) n 1
P A1
n 1
(1 i) n
N

0
1

growth

N-1 N

PA
1
Find P, given A1, g, i, N

If i=g, then P=?

1(1g)N (1i)N
....i g
i g

16

Uraian

Tahun

Penerimaan

Biaya

17

Three Major Types of Business Activities

Operating activities: those

transactions and events
related to the production
and delivery of goods
and services.

Investing activities: include

the making and collecting of
loans, the acquisition and disposal assets,
and the purchase and sale of securities other
than trading securities and cash equivalents.

Financing activities:
involve obtaining cash from lenders and
repaying those amounts and obtaining cash
from investors and providing them with a
return of and a return on their investments.
Slide 14.7

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Economic Equivalence
Which one would you prefer?
$20,000

today
$50,000 ten years from now
$ 8,000 each year for the next ten years
We need to

compare their economic worth!

Economic equivalence exists between cash flows if

they have the same economic effect.
Convert cash flows into an equivalent cash flow at
any point in time
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The Decision Making Process

Define problem
Choose objectives
Identify alternatives
Evaluate consequences
Select the best
Implement
Audit results

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Making Decisions
Preferences

Politics

People

Expert
opinion

Market
research

Costs

Facts

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Thank You

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