TOPIC 2.

MONEY-TIME RELATIONSHIPS
AND EQUIVALENCE

2.3 CASH FLOWS

Cash flow refers to the money
entering or leaving a project or
business during a specific period of
time. When analyzing the economic
feasibility of a project or design,
you will compare its cash flow with
the cash flow of other alternatives.
Cash Flow for a Simple 6-month Project

Date Amount
Jan 1 - 1,500
March 31 + 3,000
June 30 + 3,000

The project starts on January 1

with a small initial investment
and receives income in two
installments.
 CASH FLOW DIAGRAMS

Date Amount
Just as it is helpful to use Jan 1 - 1,500
force diagrams when March 31 + 3,000
analyzing
Here physical
is the cash flowforces along
diagram June 30 + 3,000

a beam,
for it isflow
the cash helpful to use
described in
cash flow on
the table diagrams (CFDs)
the previous
when
slide. analyzing cash flows
that occur over several time
periods.
A CFD is constructed using a segmented horizontal line as a time
scale, with vertical arrows indicating cash flows. An upward arrow
indicates a cash inflow or positive-valued cash flow, and a
downward arrow indicates a cash outflow, or negative-valued cash
flow. The arrows are placed along the time scale to correspond
with the timing of the cash flows.
 CASH FLOW DIAGRAMS- DETAILS

• Horizontal axis- represents time and

stretches for the duration of the project
• Upward arrows- represent cash inflows
(income, withdraws, etc.)
• Downward arrows- represent cash
outflows (expenses, deposits, etc.)
• Cash flows that occur within a time period
(both inflow and outflow) are added
together represented with a single arrow
at the end of the period.
• Initial investments are shown at time 0.
 CASH FLOW DIAGRAMS- EXAMPLE

A lawn mower will cost $600.

Maintenance costs are expected to
be $180 per year. Income from
mowing lawns is expected to be
$720 a year. The salvage value after
3 years is expected to be $175.
 Cash Flow Diagram- Perspective

• Cash flows are always from some

perspective.
• A transfer of money will be an
inflow or outflow depending on
your perspective.

Consider a borrower that takes out a loan for $5,000 at 6% interest. From the
borrower’s perspective, the amount borrowed is an inflow. From the lender’s
perspective, it is an outflow.
Example: Developing a Cash Flow Diagram (CDF) for an Investment

Figure 2.8 illustrates a loan

transaction: $1,000 is
borrowed as t=0 (today) and
repaid five equal annual
payments of $231, with the
first payment occurring 1 year
after receipt of the $1,000. An
annual compound interest rate
of 5 percent applies to the
loan.
IS A CASH FLOW DIAGRAM IMPORTANT?

A CFD presents a clear, concise,

and unambiguous description
of the amount and timing of all
cash flows associated with an
economic analysis. Also, CFDs
frequently aid in the
identification of significant cash
flow patterns that might exist
within an economic
transaction.
 SINGLE PAYMENT CASH FLOWS

A single payment cash flow

can occur at the beginning of
the time line (t=0), at the end
of the time line (t=n), or at
any time in between.
 INTEREST FORMULAS RELATING TO SINGLE PAYMENT CASH FLOWS

1. How to find the Future

Equivalent value of a
Present Sum of Money
2. How to find the Present
Equivalent value of a
Future Sum of Money
SINGLE PAYMENT COMPOUND AMOUNT FACTOR

 
o The quantity in the
equation is commonly
called the single payment
compound amount factor.
o Numerical values for this
factor have been calculated
for a wide range of values
of i and N.
 

 F = P (F/P, i%, N)
 Example: Finding F given P

A firm borrows $1000 for eight years at i = 10%. How much must it repay in a
lump sum at the end of eight year?

F = P(F/P, 10%,8)
=
=
= $2143.6
SINGLE PAYMENT PRESENT WORTH FACTOR

 
o The quantity in the
equation is commonly
called the single payment
present worth factor.
o Numerical values for this
factor have been calculated
for a wide range of values
of i and N.
 

 P = F (P/F, i%, N)
 Example: Finding P given F

How much would you have to deposit now into an account paying 10%
interest per year in order to have $1,000,000 in 40 years?

P = F(P/F, 10%,40)
=
=
=
= $22,100
 UNIFORM SERIES CASH FLOWS

A uniform series cash flow

consists of a series of equal
transactions starting at t=1
and ending at t=n. It is when
all cash flows are equally
sized and spaced.
UNIFORM SERIES SINKING FUND FACTOR
where;
A = annual equivalent value
F = future equivalent value
The expression A =F(A/F, i
%, N) is referred to as the
sinking fund factor, since it
is used to determine the
size of a deposit to place
(sink) in a fund in order to
accumulate a desired
future amount.
 Example: Finding F given A

Recall that you would need to deposit $22,100 today into an account paying 10% per year
in order to have $1,000,000 40 years from now. Instead of the single deposit, what
uniform annual deposit for 40 years would also make you a millionaire?

A = F (A/F, i%, N)
=F
= $1,000,000
= $1,000,000 (0.0023)
= $2,300
UNIFORM SERIES CAPITAL RECOVERY FACTOR

This factor is used to

calculate a uniform series
of end of period payment,
A that are equivalent to
present single sum of
money, P.
where;
A = annual equivalent value
P = present equivalent value
 Example: Finding A given P

Suppose you finance a $10,000 car over 60 months at an interest rate of 1% per month.
How much is your monthly car payment?

A = P (A/P, i%, N)
=P
= $10,000
= $10,000 (0.0222)
= $222 per month
UNIFORM SERIES COMPOUND AMOUNT FACTOR

It is used to calculate the

future single sum, F that is
equivalent to uniform series
of equal ends of period
payments, A.
 Example: Finding F given A

Assume you make 10 equal annual deposits of $2,000 into an account paying 5% per year.
How much is in the account just after the 10th deposit?

F = A (F/A, i%, N)
=A
= $2,000
= $2,000 (12.5779)
= $25,156
UNIFORM SERIES PRESENT WORTH FACTOR

The uniform series present

worth factor is used to
calculate the present sum, P
that is equivalent to a
uniform end of period
payments, A.
 Example: Finding F given A

If a certain machine undergoes a major overhaul now, its output can be increased by 20%
- which translates into additional cash flow of $20,000 at the end of each year we afford
to invest to overhaul this machine? If i= 15% per year, how much can we afford to invest
to overhaul this machine?
 

P = A (P/A, i%, N)
=A
= $20,000
= $20,000 (3.3522)
= $67,044
 UNIFORM GRADIENT SERIES

Uniform gradient series G

happens
This startswhen
with acashcash flows
flow
(revenuesgiven
(typically or expenses)
the symbolare G)
projected
at t=2 and increases
to increases
by G each or
decrease
time period
by until
a uniform
t=n, at
amount
which
eachfinal
the period.
cash Weflow can
is (n-1)G.
have
positive
The value
or of
negative
the gradient
gradients
at
if the
t=1 is slope
zero 0.
of the cash flows is
positive or negative.
 Example: Finding A when given G

Given a uniform gradient series for N periods, G, how might we determine the equivalent
uniform end-of-period, A, for N periods?
 Example: Finding P when given G

Given a uniform gradient series for N periods, G, how might we determine the present
sum at t=0?
 Factor Name Converts Symbol Formula
Single
Single Payment
Payment P
P to
to FF (( F/P,
F/P, i%,
i%, n)
n)
Compound
Compound Amount
Amount
Single Payment Present F to P (P/F, i%, n)
Single
Worth Payment Present F to P (P/F, i%, n)
Worth
Uniform Series Sinking F to A (A/F, i%, n)
Uniform
Fund Series Sinking F to A (A/F, i%, n)
Fund
Capital Recovery P to A (A/P, i%, n)
UniformRecovery
Capital Series A to A
P F (F/A, i%, n)
(A/P,
Compound Amount
Uniform Series Present A to P (P/A, i%, n)
Uniform
Worth Series A to F (F/A, i%, n)
Compound Amount
Uniform Gradient Present (P/G, i%, n) -
Uniform
worth Series Present A to P (P/A, i%, n)
Worth
Uniform Gradient future G to F (F/G, i%, n) -
worth
Uniform Gradient Present (P/G, i%, n)
Uniform Gradient uniform
worth G to A (A/G, i%, n) -
series
Uniform Gradient future G to F (F/G, i%, n)
worth
Uniform Gradient uniform G to A (A/G, i%, n)
series
 Reported by:

Cabungcal, Noreen Fatima

Comendador, Krestine
Curada, Nicole Angela