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# Ch3 - Objectives Review of Cash Flow Diagrams(Ch 2 Define...

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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
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