Cash_Flows_and_the_Time_Value_of_Money

Cash_Flows_and_the_Time_Value_of_Money - Cash Flows and the...

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1 Cash Flows and the Time Value of Money IE 226 IE 226 2 Key Concepts Key Concepts Cash Flow Diagram : the financial description (visual) of a project Time Value of Money : the value of money changes with time Money provides utility (value) when spent Value of money grows if invested Value of money decreases due to inflation Interest : used to move money through time for comparisons
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3 Cash Flow Cash Flow Movement of money in (out) of a project Inflows : revenues or receipts Outflows : expenses or disbursements Net Cash Flow: receipts – disbursements Discrete : Movement of cash to or from a project at a specific point in time. Continuous : Rate of cash moving from or to a project over some period of time. 4 Cash Flow Diagram Cash Flow Diagram Financial representation of a project. Describes type, magnitude and timing of cash flows over some horizon. 0 1 2 345 500K 50K 100K Discrete Cash Outflow (Disbursement, Expense) Note the direction of the arrow! Time Periods over the Horizon
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5 Cash Flow Diagram Cash Flow Diagram Describes type, magnitude and timing of cash flows over some horizon 0 1 2 345 500K 200K 200K Discrete Cash Inflow (Revenue) 200K 0 1 2 500K 200K 50K 100K 200K 500K 200K 6 Cash Flow Diagram Cash Flow Diagram Net cash flows add expenses and disbursements at same point in time. 01 2 3 4 5 500K 200K 50K 100K 200K 500K 200K Can write as net cash flow 2 3 4 5 500K 200K 50K 200K 500K 100K
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7 Cash Flow Diagram Cash Flow Diagram Continuous cash flows define a rate of movement of cash over time. While good for analysis, not used often. 0 1 2 345 500K 200K 200K 500K Continuous Cash Inflow (Revenue) 200K Rate of Flow per unit time 8 Cash Flow Diagram Cash Flow Diagram Can describe any investment opportunity. Typical investment:
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9 Cash Flow Diagram Cash Flow Diagram Can describe any investment opportunity. Typical investment: 0 P Make an initial investment (purchase) 10 Cash Flow Diagram Cash Flow Diagram Can describe any investment opportunity. Typical investment: 01 2 N Receive revenues over time. P 3
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11 Cash Flow Diagram Cash Flow Diagram Can describe any investment opportunity. Typical investment: 01 2 N Pay expenses over time. P 3 12 Cash Flow Diagram Cash Flow Diagram Can describe any investment opportunity. Typical investment: 2 N Receive salvage value at time N. P 3 F
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13 Cash Flow Diagram Cash Flow Diagram Can describe any investment opportunity. Typical investment: 01 2 N Write as a NET cash flow in each period. P 3 A 1 A 2 A 3 A N 14 Example (Nothing to Sneeze At!) Example (Nothing to Sneeze At!) Tissue paper company Svenska Cellulosa announced an investment of SEK490 million for a new tissue machine at its Valls, Spain plant to expand capacity by 60,000 tons/year. Most product is for retail private labels. Assume: Investment in 2006 with operations beginning in 2007. The machine has a service life of 10 years and a salvage value of SEK25M. Fixed O&M costs are SEK10 million in year 1, increase 8% per year. Revenues are SEK6,400/ton against costs of SEK4,600/ton.
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This note was uploaded on 01/24/2011 for the course IE 226 taught by Professor Tonkay during the Fall '09 term at Lehigh University .

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Cash_Flows_and_the_Time_Value_of_Money - Cash Flows and the...

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