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

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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

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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

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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A 20 000$ loan was originally made at 10% simple interest for 5 years.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?

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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

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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.

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Cash-flow Diagram
Engr. Lucas & Engr. Cortez