Source: Economics textbook
1
Ch 3 Interest and Equivalence
Source: Economics textbook
2
Objectives
•
Review of
Cash Flow Diagrams
(Ch 2)
•
Define and provide examples of the
time
value of money
•
Distinguish between
simple
and
compound interest
• Explain
equivalence
of cash flows
•
Solve problems using the single payment
compound interest formulas
Source: Economics textbook
3
Cash Flow Diagram (CFD)
•
Summarizes costs (or expenditures,
expenses, payments, disbursements, …)
and benefits (or revenues, receipts,
income, …) of engineering projects over
time (time units can be years, months,
quarters or other)
•
Cash flows are
assumed
to occur at time
0 and at the
end
of each (time) period
Source: Economics textbook
4
Cash Flow Diagram (CFD) (cont.)
•
If a cash flow occurs at the beginning of a
period (eg rent, insurance payments) it is
assumed to occur at the end of the
previous period
•
There is no cash flow within a period (if
there is we may have to choose a smaller
period, eg shift from monthly to weekly to
ensure that the cash flow occurs at the
end of a period)
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Source: Economics textbook
5
Sample Cash Flow Diagram
•At time 0 (now or today): a positive cash flow of $100
•At (the end of) period 1: a negative cash flow of $100
•At (the end of) period 2: a positive cash flow of $100
•At (the end of) period 3: a negative cash flow of $150
•At (the end of) period 4: a negative cash flow of $150
•At (the end of) period 5: a positive cash flow of $50
Revenues
Segmented timebase line
Expenses
Source: Economics textbook
6
Categories of Cash Flows
Typical expenses and receipts for
engineering projects
•
First cost = expense to build or to buy and install
•
Operations & Maintenance (O&M) = annual
expense, eg electricity, labour, 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 life of the asset
Source: Economics textbook
7
Computing Cash Flows
•
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 Fall '11
 GG
 Time Value Of Money, Interest, economics textbook

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