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This Module Contains The Basic Knowledge and Other Terminologies of Cash-Flow and Cash-Flow Diagram

This document discusses cash flow diagrams and their application in economic analysis. It begins by defining cash flow diagrams as graphical representations of cash flow over time, with receipts shown as upward arrows and disbursements as downward arrows. It then provides examples of simple and compound interest cash flow diagrams for a lender, borrower, and loan scenario involving an original loan amount extended over 10 years with a change in interest rate and type. The objectives are to understand cash flow terminology and processes, solve complex problems confidently, and apply the knowledge to other subjects.

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derping lemon
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48 views8 pages

This Module Contains The Basic Knowledge and Other Terminologies of Cash-Flow and Cash-Flow Diagram

This document discusses cash flow diagrams and their application in economic analysis. It begins by defining cash flow diagrams as graphical representations of cash flow over time, with receipts shown as upward arrows and disbursements as downward arrows. It then provides examples of simple and compound interest cash flow diagrams for a lender, borrower, and loan scenario involving an original loan amount extended over 10 years with a change in interest rate and type. The objectives are to understand cash flow terminology and processes, solve complex problems confidently, and apply the knowledge to other subjects.

Uploaded by

derping lemon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Bataan Heroes College

CASHFLOW
Module Description:
This module contains the basic knowledge and other terminologies of cash-
flow and cash-flow diagram.

Objectives of the Module:

At the end of this module, the students are expected:

a. To fully understand the terminologies and processes using cash-flow


diagram and its application on economic problem analysis.
b. To solve complex problems with confidence.
c. To apply their new knowledge with other subjects.

CASH-FLOW
Cash-flow diagram is a graphical representation of cash flow drawn on a certain
time scale. Cash-flow diagram for economic analyisis can be compared to free
body diagram for engineering mechanics problems.

RECEIPT (POSITIVE CASH FLOW)

Upward arrow

DISBURSEMENT (NEGATIVE CASH FLOW)

Downward arrow

1|Page
Cash-flow Diagram
Engr. Lucas & Engr. Cortez
Bataan Heroes College

SIMPLE INTEREST

A loan of 1000$ at a simple interest of 10% will become 1500$ after 5 years.

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Cash-flow Diagram
Engr. Lucas & Engr. Cortez
Bataan Heroes College

1500

0
5
1 2 3 4

1000
Lender’s cash flow diagram POV

3|Page
Cash-flow Diagram
Engr. Lucas & Engr. Cortez
Bataan Heroes College

1000

5
0
1 2 3 4

1500

Borrower’s cash flow diagram POV

Compound Interest

4|Page
Cash-flow Diagram
Engr. Lucas & Engr. Cortez
Bataan Heroes College

1 2 3 n-1
n
0
F=

Borrower’s cash flow diagram POV

where: P = present value

F = future value

I = interest rate

n = number of period

Example

A 20 000$ loan was originally made at 10% simple interest for 5 years. at the end of this period
the loan was extended for another 5 years, without the interest being, but the new interest rate
was made 11% compounded semi-annually. How much should the borrower pay at the end of 10
years?

5|Page
Cash-flow Diagram
Engr. Lucas & Engr. Cortez
Bataan Heroes College

Given:

P = 20 000$

i 1= 10%

i 2= 11%

n1= 5 years

n2 = 5 years

m 2= 2 for semi-annually

2 0 000
Simple interest Compound Interest

1 2 3 4 5 6 7 8 9 10
0

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Cash-flow Diagram
Engr. Lucas & Engr. Cortez
Bataan Heroes College

Formula

F = P + Pin

r
F = P(1+i)mn ;where i=
m

Solution

Compute for the future value after 5 years from year 0 using simple interest

F 5 = 20 000 + 20 000 (0.10) (5)

F 5 = 30 000 $

Compute for the future value after 5 years from year 5 using the solved value above as
present worth

F = P(1+i)mn

0.11 2 (5 )
F = 30 000(1+ )
2

F = 51 244.33 $

20 000
Simple interest Compound Interest

1 2 3 4 5 6 7 8 9 10
0

7|Page
Cash-flow Diagram
Engr. Lucas & Engr. Cortez
Bataan Heroes College

References

Arreola, Matias (1993). Engineering Economy – A Systematic Approach to Engineering


Economy (3rd ed.). Ken Incorporated.

Sta. Maria, Hipolito. (2007). Engineering Economy (3rd ed.). National Bookstore.

8|Page
Cash-flow Diagram
Engr. Lucas & Engr. Cortez

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