Ch3 - Objectives Review of Cash Flow Diagrams(Ch 2 Define and provide examples of the time value of money Distinguish between simple and compound

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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 $50 Revenues Segmented time-base line Expenses Source: Economics textbook 6 Categories of Cash Flows Typical expenses and receipts for engineering projects • First cost = expense to build or to buy and install • Operations & Maintenance (O&M) = annual expense, eg electricity, labour, minor repairs • Salvage value = receipt at project termination for sale or transfer of the equipment (can be a salvage cost) • Revenues = annual receipts due to sale of products or services • Overhaul = major capital expenditure that occurs during the life of the asset Source: Economics textbook 7 Computing Cash Flows • Identify cash receipts and disbursements at different points in time • Identify an appropriate (time) period • Prepare a table like: +$. .. or -$. .. +$. .. or -$.
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This note was uploaded on 12/07/2011 for the course ENGR 301 taught by Professor Gg during the Fall '11 term at Concordia Canada.

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Ch3 - Objectives Review of Cash Flow Diagrams(Ch 2 Define and provide examples of the time value of money Distinguish between simple and compound

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