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Time Lines and Notation

The document discusses timelines and notation used for cash flow analysis. It provides examples of how a cash flow stream of $5,000 per year for 4 years can be depicted on a timeline, whether the cash flows occur at the beginning or end of periods. Key notation for present value, future value, cash flows, annuities, discount rates, growth rates and time periods are also defined. The uses of time value of money concepts for retirement savings, loans, and investments are highlighted. Factors to consider in capital budgeting decisions like timing of cash flows, multiple cash flows, and beginning vs end of period cash flows are outlined.

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Shreya Ramaswamy
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433 views7 pages

Time Lines and Notation

The document discusses timelines and notation used for cash flow analysis. It provides examples of how a cash flow stream of $5,000 per year for 4 years can be depicted on a timeline, whether the cash flows occur at the beginning or end of periods. Key notation for present value, future value, cash flows, annuities, discount rates, growth rates and time periods are also defined. The uses of time value of money concepts for retirement savings, loans, and investments are highlighted. Factors to consider in capital budgeting decisions like timing of cash flows, multiple cash flows, and beginning vs end of period cash flows are outlined.

Uploaded by

Shreya Ramaswamy
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Time lines and notation

When cash flows occur at different points of time, it is easier to deal with them using a time line. A time line shows the timing and the amount of each cash flow in a cash flow stream.

A cash flow stream of $5,000 at the end of each of the next four years can be depicted on a time line like this: (discount rate 10%)

If cash inflows occur at the end of each period: 0 1 2 3 4

10% 10% 10% 10% $5000 $5000 $5000 $5000

If cash inflows occur at the beginning of each period: 0 1 2 3 4

10% 10% 10% 10% $5000 $5000 $5000 $5000

For notational purposes, we will assume the following for the presentation that follows:
Notation PV FV Stands For Present value Future value

CFt
A r g n

Cash flow at the end of period t


Annuity: constant cash flows over several periods Discount rate Expected growth rate in cash flow Number of years over which cash flows are received or paid

uses of time value of money


an individual may be interested in knowing how much he needs to save per year to enjoy a certain amount of income during retirement period. A loan borrower may be interested to know how much he needs to pay in future including interest and principal. A depositor may be interested to know the future value of his investments.

In evaluating capital budgeting proposals and other financing and investment decisions, the following aspects need to be considered:

1. At what point of time is the cash inflow expected? 2. If there are multiple cash inflows, at what points and periods of time would they occur? 3. Is the cash outflow only required at year 0? Or does the project require cash outflows periodically? If yes, at what periods?

Continued.
4. Do the cash inflows and outflows occur at the beginning or end of the periods? 5. What is the minimum rate of return expected out of a project? Or what return does that project generate? 6. Does it at least recover the present value of the cash outflow and some reasonable profit?

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