# System Engineering & Economy Analysis - PowerPoint PPT Presentation

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System Engineering & Economy Analysis. Lecturer Maha Muhaisen. College of Applied Engineering& Urban Planning. Lecture (5). Principles of Engineering Economy. Cash Flows. Cash flow. Cash flow diagram (CFD) summarized the cost and benefit of the project occur over time.

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System Engineering & Economy Analysis

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## System Engineering & Economy Analysis

Lecturer

Maha Muhaisen

College ofApplied Engineering& Urban Planning

## Cash Flows

### Cash flow

• Cash flow diagram (CFD) summarized the cost and benefit of the project occur over time.

• CFD is created by first drawing a segmented time – based horizontal line, divided onto appropriate time units.

• At each time at which cash flow will occur a vertical arrow is added. Pointing down for cost , pointing up for revenues or benefit.

### Key Concepts

• Cash Flow Diagram: the financial description (visual) of a project

• Time Value of Money: the value of money changes with time

• Money provides utility (value) when spent

• Value of money grows if invested

• Value of money decreases due to inflation

• Interest: used to move money through time for comparisons

### Cash Flow

• Movement of money in (out) of a project

• Inflows: revenues or receipts

• Outflows: expenses or disbursements

• Net Cash Flow: receipts - disbursements

### Cash Flows

• Discrete: Movement of cash to or from a project at a specific point in time.

• Continuous: Rate of cash moving from or to a project over some period of time.

### Cash Flow Diagram

• Financial representation of a project.

• Describes type, magnitude and timing of cash flows over some horizon.

### Cash Flow Diagram

• Describes type, magnitude and timing of cash flows over some horizon

0

1

2

3

4

5

Time Periods over the Horizon

### Cash Flow Diagram

• Describes type, magnitude and timing of cash flows over some horizon

0

1

2

3

4

5

50\$

100\$

500\$

Discrete Cash Outflow (Disbursement, Expense)

Note the direction of the arrow!

### Cash Flow Diagram

• Describes type, magnitude and timing of cash flows over some horizon

500\$

200\$

200\$

200\$

0

1

2

3

4

5

Discrete Cash Inflow (Revenue)

### Cash Flow Diagram

• Describes type, magnitude and timing of cash flows over some horizon

500\$

200\$

200\$

200\$

0

1

2

3

4

5

50\$

100\$

500\$

### Cash Flow Diagram

• Net cash flows add expenses and disbursements at same point in time.

500K

200K

200K

200K

0

1

2

3

4

5

50K

100K

Can write as net cash flow

500K

### Cash Flow Diagram

• Net cash flows add expenses and disbursements at same point in time.

500\$

200\$

200\$

100\$

0

1

2

3

4

5

50\$

500\$

### Cash Flow Diagram

• Continuous cash flows define a rate of movement of cash over time.

500\$

200\$

200\$

0

1

2

3

4

5

Continuous Cash Inflow (Revenue)

200\$ Rate of Flow per unit time

500\$

### Cash Flow Diagram

• Continuous cash flows define a rate of movement of cash over time.

• While good for analysis, not used often.

500\$

200\$

200\$

0

1

2

3

4

5

Continuous Cash Inflow (Revenue)

200\$ Rate of Flow per unit time

500\$

### Cash Flow Diagram

• Can describe any investment opportunity.

• Typical investment:

### Cash Flow Diagram

• Can describe any investment opportunity.

• Typical investment:

0

P

Make an initial investment (purchase)

### Cash Flow Diagram

• Can describe any investment opportunity.

• Typical investment:

0

1

2

3

N

P

### Cash Flow Diagram

• Can describe any investment opportunity.

• Typical investment:

0

1

2

3

N

P

Pay expenses over time.

### Cash Flow Diagram

• Can describe any investment opportunity.

• Typical investment:

Receive salvage value at time N.

F

0

1

2

3

N

P

### Cash Flow Diagram

• Can describe any investment opportunity.

• Typical investment:

AN

A3

A2

0

1

2

3

N

A1

P

Write as a NET cash flow in each period.

### Example (Nothing to Sneeze At!)

• Tissue paper company Svenska Cellulosa announced an investment of \$490 million for a new tissue machine at its Valls, Spain plant to expand capacity by 60,000 tons/year. Most product is for retail private labels.

• Assume: Investment in 2006 with operations beginning in 2007. The machine has a service life of 10 years and a salvage value of \$25M. Fixed O&M costs are \$10 million in year 1, increase 8% per year. Revenues are \$6,400/ton against costs of \$4,600/ton.

• Draw the cash flow diagram.

• Timeline

0

1

2

3

10

### Cash Flow Diagram

• Individual cash flows: Investment Cost

0

1

2

3

10

490M

### Cash Flow Diagram

• Individual cash flows:Per Unit Revenues

384M

384M

384M

384M

0

1

2

3

10

490M

### Cash Flow Diagram

• Individual cash flows: Per Unit Costs

384M

384M

384M

384M

0

1

2

3

10

276M

276M

276M

276M

490M

### Cash Flow Diagram

• Individual cash flows: Fixed Costs

384M

384M

384M

384M

0

1

2

3

10

276M

276M

276M

276M

10M

10.8M

11.7M

20M

490M

### Cash Flow Diagram

• Individual cash flows: Salvage Value

25M

384M

384M

384M

384M

0

1

2

3

10

276M

276M

276M

276M

10M

10.8M

11.7M

20M

490M

### Cash Flow Diagram

• Net Cash Flow Diagram

113M

98.0M

97.2M

96.4M

89.5M

0

1

2

3

9

10

490M

### Cash Flow Diagram

• Net Cash Flow Diagram

113M

98.0M

97.2M

96.4M

89.5M

0

1

2

3

9

10

This is a “typical” investment.

(Invest at zero, returns later.)

490M

### Cash Flow Diagram

• Net Cash Flow Diagram

113M

98.0M

97.2M

96.4M

89.5M

0

1

2

3

9

10

This is a “typical” investment.

(Invest at zero, returns later.)

490M

Sheet defined by rows and columns of cells.

Can enter the following into a cell:

• Data: Input that is fixed.

• Variables: Input that can change.

• Accomplished by references.

• Absolute references are fixed when copied.

• Relative references change when copied.

• Functions: Accept input (arguments) and return pre-defined output.

• Combinations: Data, Variables, and Functions.

• Labels: Formatting that makes it easy to read!

• Put data in a “data center” and reference it (so you can change it easily).

• Label units, scales, time, etc.

• Use formatting to make it easy to read.

• Put data in a “data center” and reference it (so you can change it easily).

• Label units, scales, time, etc.

• Use formatting to make it easy to read.

If you don’t, you will just end up doing it again!

Data Center with Data

Relative Reference: A13: Copies relative distance between cell and

copied cell to the new cell.

Absolute Reference: \$G\$4: Copies the cell reference exactly (fixed).