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System Engineering & Economy Analysis

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System Engineering & Economy Analysis

Lecturer

Maha Muhaisen

College ofApplied Engineering& Urban Planning

Principles of Engineering Economy

Cash Flows

- 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.

- 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

- Movement of money in (out) of a project
- Inflows: revenues or receipts
- Outflows: expenses or disbursements
- Net Cash Flow: receipts - disbursements

- 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.

- Financial representation of a project.
- Describes type, magnitude and timing of cash flows over some horizon.

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

0

1

2

3

4

5

Time Periods over the Horizon

- 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!

- 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)

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

500$

200$

200$

200$

0

1

2

3

4

5

50$

100$

500$

- 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

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

500$

200$

200$

100$

0

1

2

3

4

5

50$

500$

- 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$

- 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$

- Can describe any investment opportunity.
- Typical investment:

- Can describe any investment opportunity.
- Typical investment:

0

P

Make an initial investment (purchase)

- Can describe any investment opportunity.
- Typical investment:

0

1

2

3

N

P

Receive revenues over time.

- Can describe any investment opportunity.
- Typical investment:

0

1

2

3

N

P

Pay expenses over time.

- Can describe any investment opportunity.
- Typical investment:

Receive salvage value at time N.

F

0

1

2

3

N

P

- 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.

- 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

- Individual cash flows: Investment Cost

0

1

2

3

10

490M

- Individual cash flows:Per Unit Revenues

384M

384M

384M

384M

0

1

2

3

10

490M

- Individual cash flows: Per Unit Costs

384M

384M

384M

384M

0

1

2

3

10

276M

276M

276M

276M

490M

- 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

- 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

- Net Cash Flow Diagram

113M

98.0M

97.2M

96.4M

89.5M

0

1

2

3

9

10

490M

- 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

- 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.)

Can also use a spreadsheet!

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!

- Give your spreadsheet a title.
- 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.

- Give your spreadsheet a title.
- 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).

Function Call: SUM(argument1, argument2,…) = argument1+argument2…