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Cash Flow- expenses and receipts
Engineering projects generally have economic
consequences that occur over an extended period of
time
For example, if an expensive piece of machinery is
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Categories of Cash Flows
The expenses and receipts due to engineering
projects usually fall into one of the following
categories:
First cost: expense to build or to buy and install
Operations and maintenance (O&M): annual expense,
such as electricity, labor, and minor repairs
Salvage value: receipt at project termination for sale or
transfer of the equipment (can be a salvage cost)
Revenues: annual receipts due to sale of products or
services
Overhaul: major capital expenditure that occurs during
the assets life
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Examples of Cash Inflows & Outflows
Slide 14.8 4
Types of Cash Flows
Single cash flow
Uniform series
Linear gradient series
Geometric gradient series
Irregular series
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Cash Flow Diagrams
The costs and benefits of engineering
projects over time are summarized on a
cash flow diagram.
Cash flow diagram illustrates the size,
sign, and timing of individual cash
flows, and forms the basis for
engineering economic analysis
Tool! To show expenses and receipts
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Cash Flow Diagrams
Pictorial representation of
engineering economic problem
incomes and expenditures
time period
interest rate
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Cash Flow diagrams--How
A cash flow diagram is created by first
drawing a segmented time-based
horizontal line, divided into appropriate
time unit. Each time when there is a
cash flow, a vertical arrow is added
pointing down for costs and up for
revenues or benefits. The cost flows are
drawn to relative scale
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Cash Flow Diagrams
P-Pattern present
1 2 3 n
F-Pattern future
1 2 3 n
A-Pattern annual
1 2 3 n
G-Pattern gradient
1 2 3 n
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Cash Flow Diagrams
$15,000
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Single Cash Flow
F
Compounding Process
P
Discounting Process
F
F P(1 i) N P
(1 i) N
P=Present equivalent value A=Annual equivalent value
F= Future equivalent value
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Example: Value and Interest
The value of money depends on the amount
and when it is received or spent.
Example: What amount must be paid to settle a
current debt of $1000 in two years at an interest
rate of 8% ?
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$1166 12
Uneven Payment Series
Find the present worth of any uneven stream of
payments by calculating the present value of each
individual payment and summing the results
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Equal Payment Series
F
0 1 2 3 N-1
N
A A A A A A
N 1 N2
F A(1 i) A(1 i) ......A(1 i) A
0
0 1 2 N-1 N
(1 i) N iN 1
P G
i 2 (1 i) N
1(1g)N (1i)N
P
PA ....i g
1 i g
Find P, given A1, g, i, N
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Uraian Tahun
0 1 2 3 n
Penerimaan
Biaya
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Three Major Types of Business Activities
Operating activities: those
transactions and events
related to the production
and delivery of goods
and services.
Investing activities: include
the making and collecting of
loans, the acquisition and disposal assets,
and the purchase and sale of securities other
than trading securities and cash equivalents.
Financing activities:
involve obtaining cash from lenders and
repaying those amounts and obtaining cash
from investors and providing them with a
return of and a return on their investments.
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Economic Equivalence
Which one would you prefer?
$20,000 today
$50,000 ten years from now
$ 8,000 each year for the next ten years
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Making Decisions
Preferences
Politics People
Facts
research
opinion
Market
Expert
Costs
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Thank You
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