Cash Flow Diagrams:

Cash flow diagrams visually represent income and expenses over some time
interval. The diagram consists of a horizontal line with markers at a series of
time intervals. At appropriate times, expenses and costs are shown.

Note that it is customary to take cash flows during a year at the end of the
year , There are certain cash flows for which this is not appropriate and must
be handled differently. The most common would be rent, which is normally
taken at the beginning of a cash period. There are other pre-paid flows which
are handled similarly.

1 2 3 4 5 6 7 8

A A A A A
p
F

Discount Factors and Equivalence

Present Worth (P): present amount at t = 0

Future Worth (F): equivalent future amount at t = n of any present amount

at t = 0

Annual Amount (A): uniform amount that repeats at the end of each year
for n years

Uniform Gradient Amount (G): uniform gradient amount that repeats at

the end of each year, starting at the end of the second year and stopping at
the end of year n.

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Duration of single payment Factors:
If an amount of money p is invested at same time t=0 ,the amount of money
F1 that will be accumulated after 1 year at interest rate of (i) per year will
be:

F1 = p + pi

F1= P ( 1 + i )

At the end of second year the amount accumulated will be:

F2 = F1 + F1 * i

F2= p (1+ i) + p (1 + i) i

F2= p (1 + i+ i+ i2)

F2= p (1 + i) 2

Find for n years:

F = p (1 + i )n single compound factor .

P= present worth factor.

Example:

If you borrowed 1000 $ at 6 % compound interest per year. Find the amount
for each year, and find the total amount at the end of 3 years? List the table
of calculation?

1000 n=3
i=6%

0 1 2

F=?

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Sol:

In case of simple interest :

I=pni 1000 * 3 * 0.06 = 180 $

F=p+pni F = 1000 + 180 = 1180 $

For compound interest

F = p (1+i) n

F = 1000 (1 + 0.06)3 = 1191. 02 $

Borrowed Owned
Yrs. Interest
money money

0 1000 ----- 1000

1 ----- 1000 * 1 * 0.06 = 60 1060

2 ----- 1060 * 1 * 0.06 = 63.6 1123.6

3 ----- 1123.6 + 1* 0.06 = 67.38 1191.02

Example:

If the deposited amount is 1000 $ for each year. Calculate the amount
gained at the end of 4 yea at compound interest 7 % per year. List the table
of calculation?

F=3

i=7%

0 1 2 3 4

1000 1000 1000 1000 1000

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Sol:

F0 = p = 1000 $

F1 =1000 + (1000+I) = 1000+1000 +1000*1*0.07= 2070$

F2 = 1000 +F1 + F1 i = 1000+2070 +2070* 0.07= 3214.90$

F3 = 1000 + F2 +F2 i = (1000 + 3214.90 + 3214.4*0.07=4439.9 $

F4 = 1000 + F3 +F3 i = (1000 + 4439.9 + 4439.9*0.07)= 5740.73$

Another method:

F0 = 1000 (1+ 0.07)0 = 1000

F4 = 1000(1+ 0.07)4 = 1310.7

F3 = 1000(1+ 0.07)3 = 1225.09

F2 = 1000(1+ 0.07)2 = 1144.9

F1 = 1000(1+ 0.07) = 1070

F = ∑ F n = 1310.7+1225.09+1144.9+1070+1000 = 5740.73

Deposited Gained
Yrs. Interest
amount amount

0 1000 1000

1 1000 1000 + 1 + 0.07 = 70 2070

2 1000 2070 +1+ 0.07 = 144.2 3214.2

3 1000 3214.2+1+ 0.07 = 225.04 4439.9

4 1000 4439.9+1+ 0.07 = 310.7 5750.73

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Present Value – PV:
What is 'Present Value - PV'

Present value (PV) is the current value of a future sum of money or stream
of cash flows given a specified rate of return. Future cash flows are
discounted at the discount rate, and the higher the discount rate, the lower
the present value of the future cash flows. Determining the appropriate
discount rate is the key to properly valuing future cash flows, whether they
be earnings or obligations.to find P we need this equation

P= A [ ]

P=

Example:

A company deposited in a bank 100,000 $ with an interest 6% for 9 years.

What is the summation of these payments.

Example:

Suppose you are depositing an amount today in an account that earns 5%

interest, compounded annually. If your goal is to have $5,000 in the account
at the end of six years, how much must you deposit in the account today?

Example:

For the Cash Flow Diagrams find the value of p?

i = 10% 4

0 1 2 3

5000 5000
5000 5000

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Future Value – PV:
Is the value of an asset at a specific date. It measures the nominal future
sum of money that a given sum of money is "worth" at a specified time in
the future with a certain interest rate.

F = p (1+i) n

F=A[

Example:

A company deposited in a bank 100,000 $ with an interest 6% for 9 years.

Find the value at the end of the useful lives of project

Example:

For the Cash Flow Diagrams find the value of F?

F?

i = 10% 4

0 1 2 3

5000 5000 5000 5000

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Derivations of a uniform series of payments worth –
fact(A.V):
Uniform series of payments is a series of equal payment, occurring at equal
periods of time, and it’s included:

1- When a dept. is paid by making of a series equal periodic payments .

2- When a series at equal periodic payments is made in order to accumulate

a desired amount of future worth.

3- When one receivers a series of equal payment at equal periods instead of

a single lump sum payment.

4- To account the decreasing n the value of a property which is going to

occur in future.

5- To determine a series of equal payments which would be equivalent to a

group of unequal payments made in unequal intervals.

A= p [

A=F [ ]

Example.

A company deposited yearly in a bank 7.825*106 $ with an interest 6% for 9

years. What is the summation of these annual payments?

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Sol.

Compounding factor for the uniform series of payments is:

F= A [

F= 7.825*106 [ ] = 89.919 * 106 $

Example:

The international construction bank gives a dept. equal to 8.79*106 $ with

an interest 8% for a certain project which must be recovered in 10 years
what is the annual payment that must be paid to the bank ?

p = 8.79*106

0 1 2 9 10

A=

Sol.

A = 8.79 * 106 [ ]

A = 1.3 * 106 $

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Uniform series with middle of period cash flows:
When assumed the cash flow occur at the middle of each time period, the interest factors
multiplied by "Half-period correction" factor.

i.e: when (i) is the effective interest rate per period the half – period correction (HPC) is
applied to interest factors in Appendix.

HPC=√

Example:

The figure below is cash flow diagram of annually consisting of 4 middle of year amounts of
200 $. If (i) per year = 10% . Determine:

a) The present worth of the uniform series at the beginning of the first year.

b) The equivalent future worth at the end of the fourth year.

P0 = ?
F4 = ?

200 200 200 200

P-1/2

- 1/2 0 1 2 3 4

Sol.

a)

P- = A (P/A, 10% , 4)

P-1/2 = 200 [ ] 633.98$

P0= P- ⁄ (HPC) = 633.98 √

= 633.98 * 1.048 = 664.92 $

b)

F4 = A (F/A, 10 %, 4) (HPC)

= 200(4.641) (1.048) = 973.5 $

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Example:

If 1500 $ is to be received at the end of 5 years when i per year is 15 %. What middle –of –
year uniform amount would be equivalent to this future amount?

F5 = 1500 $
𝟏
F 4𝟐
A=?

0 1 2 3 4 5

Sol.

F4 (HPC) = F5

HPC = √ = 1.0724

A = F4 * ( ⁄

A= (0.1483) = 207.43 $

Uniform Gradient Series:-

The uniform gradient cash flow series which either increase or decrease

1 2 3 n
0

g1 g
2 g3
P

(n-1)g

That means the cash flow either is increased or decreased (cost) changes by the same
amount each year which is called the (gradient).

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1) Finding P when given G :-

P=G[ ] + 2G [ ] + …… +(n-2) G[ ]

P= - ]

2) Finding A when given G:-

P=G [ ]

A1
Increasing Gradient
A2

P= [ - ]

A1+ R* A1+ R*

By converting the triangle part (A2-A1) to an equivalent R* and then added to A:

A= [ - ] ]

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A=G[ - ]

A= [ ] important.

When we have decreasing gradient:-

A2

decreasing Gradient
A1

A1- R* A1- R*

R* = [ ] Important

Ex.

Alternative-1: Initial purchase cost = Rs.300000, Annual operating and maintenance cost
= Rs.20000, Expected salvage value = Rs.125000, Useful life = 5 years.

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