- Cash flow diagrams graphically represent cash inflows and outflows over time using arrows. Upward arrows indicate receipts (inflows) while downward arrows indicate disbursements (outflows).
- The document provides an example cash flow diagram for a loan and examples of using the equation of value method to solve problems involving cash flows with different amounts and timing.
- It concludes with an exercise involving analyzing whether an engineer should purchase a machine by comparing the present worth of future income cash flows from the machine to its price, with the cash flows to be depicted in a diagram.
- Cash flow diagrams graphically represent cash inflows and outflows over time using arrows. Upward arrows indicate receipts (inflows) while downward arrows indicate disbursements (outflows).
- The document provides an example cash flow diagram for a loan and examples of using the equation of value method to solve problems involving cash flows with different amounts and timing.
- It concludes with an exercise involving analyzing whether an engineer should purchase a machine by comparing the present worth of future income cash flows from the machine to its price, with the cash flows to be depicted in a diagram.
- Cash flow diagrams graphically represent cash inflows and outflows over time using arrows. Upward arrows indicate receipts (inflows) while downward arrows indicate disbursements (outflows).
- The document provides an example cash flow diagram for a loan and examples of using the equation of value method to solve problems involving cash flows with different amounts and timing.
- It concludes with an exercise involving analyzing whether an engineer should purchase a machine by comparing the present worth of future income cash flows from the machine to its price, with the cash flows to be depicted in a diagram.
- Cash flow diagrams graphically represent cash inflows and outflows over time using arrows. Upward arrows indicate receipts (inflows) while downward arrows indicate disbursements (outflows).
- The document provides an example cash flow diagram for a loan and examples of using the equation of value method to solve problems involving cash flows with different amounts and timing.
- It concludes with an exercise involving analyzing whether an engineer should purchase a machine by comparing the present worth of future income cash flows from the machine to its price, with the cash flows to be depicted in a diagram.
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Cash Flow Diagrams
-a graphical representation of cash flows drawn on a time scale
Meaning of the arrows in the cash flow diagram:
An arrow pointing upwards represents a receipt (cash inflow)
An arrow pointing downwards represents a disbursement (cash outflow)
Illustration: A loan of P 100 at simple interest of 10% will become P 150 after 5 years.
A. Lender’s Viewpoint P 150
Ist yr 2nd yr 3rd yr 4th yr 5th yr
_____I_____I_____I_____I_____I_
P 100
B. Borrower’s Viewpoint P 100
Ist yr 2nd yr 3rd yr 4th yr 5th yr
_____I_____I_____I_____I____I_
P 150
Example: Annual deposits were made in a fund earning 10% per annum. The first deposit was P2,000 and each deposit thereafter was P 200 less than the preceding one. Determine the amount in the fund after the sixth deposit. Solution:
Equation of Value -is obtained by equating the sum of the values on a certain comparison or focal date of one set of obligations (payments) to the sum of the values on the same date of another set of obligations (payments)
Example: A debt of P15,000 was paid for as follows: P4,000 at the end of 3 months P5,000 at the end of 12 months P3,000 at the end of 15 months A final payment F at the end of 21 months. If the rate of interest was 18% compounded quarterly, find the final payment F.
Equate the sum of the present values of all payments to the amount of the loan of P 15,000 15,000 = 4,000 (1+0.045)-1 + 5,000 (1+0.045)-4 + 3,000 (1+0.045)-5 + F (1+0.045)-7
Solving for F:
F = 4,572.09 / 0.73483
F = P6,221.97 (Answer)
Exercise
An engineer is considering the purchase of a machine that is expected to be obsolete in 5 years. The machine is worth P100,000. The prevailing rate of interest is 15%. The estimate of the annual gross incomes from the use of the machine is as follows:
Should the machine be purchased by the engineer? Draw a cash flow diagram (in the perspective of the engineer) as a part of your analysis. (Hint: the engineer should buy the machine if the present worth of all the incomes is greater than its price)
