Cash Flow

1
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

2
 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

3
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 4
 Types of Cash Flows
Single cash flow
Uniform series
Linear gradient series
Geometric gradient series
Irregular series

5
 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

6
 Cash Flow Diagrams
Pictorial representation of
engineering economic problem
incomes and expenditures

time period

interest rate

7
 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

8
 Cash Flow Diagrams

P-Pattern present
1 2 3 n

F-Pattern future
1 2 3 n

A-Pattern annual
1 2 3 n

G-Pattern gradient
1 2 3 n

9
 Cash Flow Diagrams

$15,000

Positive net Cash flow $2000

(receipts) $13,000 is net positive cash flow

1 2 3 4 5 Time (# of interest periods)

0

Negative net Cash Flow

(payments)

10
 Single Cash Flow

F
Compounding Process
P
Discounting Process

F
F P(1 i) N P
(1 i) N
P=Present equivalent value A=Annual equivalent value
F= Future equivalent value

11
 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
P5
P1 P2 P6
P3 F
P0 P4 P
(1 i) N
0 Years

13
 Equal Payment Series
F

0 1 2 3 N-1
N

A A A A A A

N 1 N2
F A(1 i) A(1 i) ......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:


N
(1 i) 1

FA
N
F(1 i) F - A A(1 i) i

14
 Linear Gradient Series
(N-1)G
A1
2G
G
Uniform Series

0
0 1 2 N-1 N

(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 growth
Example: price changes due to inflation

A1(1+g)N-1 Present Worth, Pn, of any Cash Flow An

Pn A n (1 i) n A 1 (1 g) n 1 (1 i) n
A1(1+g)
A1 N(1 g) n 1
P A1 If i=g, then P=?
0 n 1 (1 i) n
1 2 3 N-1 N
g>0

1(1g)N (1i)N
P

PA ....i g
1 i g
Find P, given A1, g, i, N
16
 Uraian Tahun

0 1 2 3 n

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 18
 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
19
The Decision Making Process
Define problem
Choose objectives
Identify alternatives
Evaluate consequences
Select the best
Implement
Audit results

20
 Making Decisions

Preferences

Politics People

Facts
research

opinion
Market

Expert
Costs

21
Thank You

22