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Lecture No. 6

1. The document discusses concepts related to simple interest, compound interest, and time value of money. It provides examples of calculating simple interest over 3 years on an original principal of $1000 at 8% annual interest. 2. Cash flow is defined as the net amount of cash coming in and going out of a company over a period of time. Cash inflows include revenues, while cash outflows include expenses. Cash flows can be analyzed using a cash flow statement. 3. A cash flow diagram visually depicts the cash flows over multiple time periods, with upward arrows representing cash inflows and downward arrows representing cash outflows. It is used to analyze engineering projects.

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Mohsin Iqbal
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31 views

Lecture No. 6

1. The document discusses concepts related to simple interest, compound interest, and time value of money. It provides examples of calculating simple interest over 3 years on an original principal of $1000 at 8% annual interest. 2. Cash flow is defined as the net amount of cash coming in and going out of a company over a period of time. Cash inflows include revenues, while cash outflows include expenses. Cash flows can be analyzed using a cash flow statement. 3. A cash flow diagram visually depicts the cash flows over multiple time periods, with upward arrows representing cash inflows and downward arrows representing cash outflows. It is used to analyze engineering projects.

Uploaded by

Mohsin Iqbal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture no.

Engr. M. Nouman,
Lecturer, CED, SUIT.
Email: [email protected]
• Simple interest is interest that is computed on the original
sum.
• If you loan an amount P for n years at a rate of i (%) a year,
then after n years you will have;
• � + � × (��) = � + � × � × � = � × (1 + � × �)

Construction Management (Engr. M. Nouman) - Fall 2022 2


• Example: End of Beginning Interest Ending
Year Balance earned Balance
• � = 1000 $
•�=8% 0

• � = 3 �����
1 $1,000 $80 $1,080

2 $1,080 $80 $1,160

3 $1,160 $80

Construction Management (Engr. M. Nouman) - Fall 2022 3


• Compound interest is the interest that is charged on the
original sum and the un-paid interest.
• You put 500$ in a bank for 3 years at 6% compound interest
per year.
• At the end of year 1 you have (1.06) x 500 = $530 
• At the end of year 2 you have (1.06) x 530 = $561.80 
• At the end of year 3 you have (1.06) x 561.80 = $595.51 

Construction Management (Engr. M. Nouman) - Fall 2022 4


• Note:  
• $595.51 = 1.06 x 561.80
• $595.51 = 1.06 x 1.06 x 530
• $595.51 = 1.06 x 1.06 x 1.06 x 500 = 500 x (1.06)3

Construction Management (Engr. M. Nouman) - Fall 2022 5


(2) = (1) x 10% (3) = (1) + (2)
(1) Amount owed
Period Interest amount for Amount owed at the end of
beginning of the period
the period the period

1 1000 $ 100 $ 1100 $

2 1100 $ 110 $ 1210 $

3 1210 $ 121 $ 1331 $

Construction Management (Engr. M. Nouman) - Fall 2022 6


• Example: End of Beginning Interest Ending
Year Balance earned Balance
• � = 1000 $
•�=8% 0

• � = 3 �����
1 $1,000 $80 $1,080

2 $1,080 $86.40 $1,166.40

3 $1,166.40 $93.31

Construction Management (Engr. M. Nouman) - Fall 2022 7


$1,259.71

n  0:P
n  1 : F1  P (1  i )
n  2 : F 2  F1 (1  i )  P (1  i ) 2
 1 2
0
n  N : F  P (1  i ) N 3
P=1000 $
�ℎ� ������ (1 + �)� �� ������ i=8 %
������ ������� �������� ������. 3
F  $ 1, 0 0 0 (1  0 .0 8 )
$1,000
 $ 1, 2 5 9 .7 1

Construction Management (Engr. M. Nouman) - Fall 2022 8


• Example: If you want to have $800 in savings at the end of four years, and
5% interest is paid annually, how much do you need to put into the savings
account today?
• �� ����� �ℎ� �������� ��� � ���ℎ � = 0.05, � = 800 $ ��� � = 4 ���.
�
� = � × (1 + �)� => � =
(1 + �)�
800
�=
(1 + 0.05)4

� = 658.16 $

Construction Management (Engr. M. Nouman) - Fall 2022 9


• The change in the amount of money over a given time
period is called the time value of money (TVM). It is the
most important concept in engineering economy.
OR
• The TVM is the concept that money available at the present
time is worth more than the identical sum in the future due
to its potential earning capacity.
• A sum of money in the hand has greater value than the
same sum to be paid in the future.

Construction Management (Engr. M. Nouman) - Fall 2022 10


§ Cash Flow:
• The term cash flow refers to the net amount of cash being
transferred in and out of a company.
• Cash flow is the amount of cash that comes in and goes out
of a company.
• Businesses take in money from sales as revenues and
spend money on expenses.
• Cash received represents inflows, while money spent
represents outflows.

Construction Management (Engr. M. Nouman) - Fall 2022 11


§ Cash Flow:
• Cash flows can be analyzed using the cash flow statement, a standard
financial statement that reports usage of cash over a specified time period.
• The cash flow statement is one of the most important financial statements
issued by a company, along with the balance sheet and income statement.
• A balance sheet is a financial statement that reports a company's assets,
liabilities, and shareholder equity.
• The income statement focuses on the revenue, expenses, gains, and losses
of a company during a particular period. Also known as the profit and loss
(P&L) statement.

Construction Management (Engr. M. Nouman) - Fall 2022 12


F=11,713 $

§ Cash Flow Diagram:


• T he diagram showing t he amount of cash
(currency) that is generated or consumed in a 0
given time period. 1 2 3 4 N=5
§ Notation/Convention: i=10% per year
• T h e h o r i zo n t a l l i n e i s a t i m e s c a l e, w i t h
progression of time moving from left to right. P=8000 $
• Arrows signify cash flows and are placed at the
end of the period.
• Downward arrows represent expenses and
upward arrows represent receipts.

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S=2000 $

F=11,713 $
§ Salvage value:
• Salvage value is the estimated
resale value of an asset at the end 0
of its useful life. 1 2 3 4 N=5

• Salvage value is subtracted from i=10% per year


t h e c o s t o f a f i xe d a s s e t t o
determine the amount of the asset P=8000 $
cost that will be depreciated.
•

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§ Example:
• The XYZ Corporation insists that its engineers develops a
cash flow diagram of the proposal.
• An investment of $10,000 can be made that will produce
uniform annual revenue of $ 5310 for 5 years and the have a
positive salvage value of $2000 at the end of year 5.
• Annual expenses will be $ 3000 at the end of each year for
operating and maintaining the project.
• Draw a cash flow diagram for the 5 year life of project?

Construction Management (Engr. M. Nouman) - Fall 2022 15


2000 $
5310$ 5310$ 5310$ 5310$
5310 $

0
1 2 3 4 N=5

3000$ 3000$ 3000$ 3000$ 3000$

P=10,000 $

Construction Management (Engr. M. Nouman) - Fall 2022 16

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