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Chapter 2 CFD 2015

The document discusses cash flow diagrams and cash flow analysis. It defines key terms like cash inflows, outflows, present value, and future value. It explains how to represent cash flows visually in a diagram and numerically in a table using standard notation. The concepts of uniform series and uniform gradients of cash flows are introduced for calculating equivalent values over time periods. Examples are provided to illustrate how to calculate future or present cash flows given interest rates, time periods, annual payments, and gradients.

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ananiya dawit
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19 views39 pages

Chapter 2 CFD 2015

The document discusses cash flow diagrams and cash flow analysis. It defines key terms like cash inflows, outflows, present value, and future value. It explains how to represent cash flows visually in a diagram and numerically in a table using standard notation. The concepts of uniform series and uniform gradients of cash flows are introduced for calculating equivalent values over time periods. Examples are provided to illustrate how to calculate future or present cash flows given interest rates, time periods, annual payments, and gradients.

Uploaded by

ananiya dawit
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter – Two

Cash-Flow and Cash Flow Diagram


 Any organization involved in a project received and
spend different amounts of money at different points in
time.
 Cash flow diagram is visual representation of this inflow
and outflow of funds with time.
 The cash flow profile should include all cash items of a project.
The major items included are:
» First cost, P, is the sum of the costs required to bring the asset
into service
» Salvage, S, is the net sum realized from the disposal of the asset
at the termination of its economic life.
» Income (revenues), other benefits and expenses. 1
Cash Flow
 In practice cash flow does not follow any pattern,
however for simplification
all cash incomings and outgoings are assumed to
happen either at the beginning or end of a period.
 The period could be
 day, week, month, quarter, or year.
 Cash Inflows – Revenues (R), receipts, incomes, savings
generated by projects and activities that flow in. Plus sign
used(+ve)

 Cash Outflows – Disbursements (D), costs, expenses, taxes caused


by projects and activities that flow out. Minus sign used(-ve)
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Cash Flow in a Firm
Stockholders’ Other Corporations, Creditors
(Equity) Businesses and Agencies (Debt)

Outside Investment Loan Payment Loan


Dividends

Investment
CASH
Collections

Purchase Sale Payment Accounts


Payment for of Assets of Assets of Expenses Receivables
Material

Personal Expenses
Fixed Wages, Benefits Net Net
Raw Assets Credit Cash
& Operating Exp.
Materials Sales Sales
Sales
Depreciation Labor Expense
Expense

Work in Product
Process Inventories
ECONOMIC EQUIVALENCE

Definition: Combination of interest rate


(rate of return) and time value of
money to determine different amounts
of money at different points in time
that are economically equivalent.

• Established when we are indifferent


between a future payment, or a series
of future payments, and a present
sum of money . 4
Considers the comparison of alternative
options, or proposals, by reducing them
to an equivalent basis, depending on:
interest rate;
amounts of money involved;
timing of the affected monetary
receipts and/or expenditures;
manner in which the interest , or
profit on invested capital is paid and
the initial capital is recovered.
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Cash Flow Diagrams / Table Notation
i = effective interest rate per interest period
N = number of compounding periods.
P = present sum of money; the equivalent value of one
or more cash flows at the present time reference
point
F = future sum of money; the equivalent value of one or
more cash flows at a future time reference point
A = end-of-period cash flows (or equivalent end-of-
period values ) in a uniform series continuing for a
specified number of periods, starting at the end of the
first period and continuing through the last period
G = uniform gradient amounts - used if cash flows
increase by a constant amount in each period. 7
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Standard notation used in equivalence
relating one with other
(X/Y, i%, n)
 The first letter in the parentheses (X)
represent what you “Want to find”, while
the second letter (Y) represents what is
“Given”.
 For example, F/P means “find F when
given P”. The i is the interest rate in
percent and n represents the number of
periods involved. 9
Relating Present and Future Equivalent values of
Single Cash Flows
• Finding F when given P:-
Read as Finding future value when given present value
F = P ( 1+i ) N
 (1+i)N single payment compound amount factor
 functionally expressed as F = P( F / P, i%,N )

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Cont…,
• Finding P when given F:-
Read as Finding present value when given future value
• P = F (1 / (1 + i )N )
 (1+i)-N single payment present worth factor
 functionally expressed as P = F ( P / F, i%, N )

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Uniform Series to Present and Future Equivalent Values
• Finding F given A and Finding A given F:
• Finding future equivalent income (inflow) value given a
series of uniform equal Payments

– uniform series compound amount factor


– functionally expressed as

F = A(F/A,i,n) A = F(A/F,i,n)

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Uniform series to present and future equivalent values
• Finding P given A and Finding A given P:
• Finding present and uniform series equivalent value
given a series of equal receipts

A = P ( A / P,i%,N )

A = Given A=?

0 1 2 3 4 5
0 1 2 3 4 5
P=? P = Given

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Uniform gradient of cash flows to Present equivalents

Find P when given G:


Find the Present equivalent value when given the uniform
gradient amount

Functionally represented as :

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Uniform Gradient Of Cash Flows To Annual And
Present Equivalents
• Find A when given G:
• Find the annual equivalent value when given the
uniform gradient amount
1 N
• A=G -
i (1 + i ) N - 1
• Functionally represented as A = G ( A / G, i%,N )
• The value shown in [ ] is the gradient to uniform series
conversion factor.

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Examples

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Additional
Examples
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1- You put 1,000 Birr in the Bank account at the end of 2000.
the interest rate is 7% per year. What amount will you have in
your account at the end of 2015?

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2- How much must a contractor invest NOW to provide a lump
sum of Birr 1,000 to pay at the year 6 years, 8 years & 12 years
from now. If interest is 5%?

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3- Suppose you make an annual contribution of $5,000 to your
savings account at the end of each year for five years. If your
savings account earns 6% interest annually, how much can be
withdrawn at the end of five years.

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4- find the present worth for the following CFD at
15% per year.

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Cont…,
5- What is the present equivalent value of 50000 birr,
5 years from now at 14% compounded
semiannually?
Solution
ieff = (1+.14/2)2-1 = 14.49%
Present equivalent P = 50000(P/F, ieff, 5 yrs)
= 50000(.5085)=25417.46birr
Alternatively
Present equivalent P = 50000(P/F, inom/2, 10)
= 50000/(1+0.07)10= 50000 x0.5085) =25417.46birr

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Thank you!

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