Categories of Cash Flows

The expenses and receipts due to engineering projects usually fall into one of the following
categories:
 First cost = expense to build or to buy and install
 Operating and maintenance (O&M) ≡ annual expenses, such as electricity, labor, and
minor repairs
 Salvage value ≡ receipt at project termination for sale or transfer of the equipment (can
be a salvage cost)
 Revenues ≡ annual receipts due to the sale of products or services
 Overhaul ≡ major capital expenditure that occurs during the asset’s life

Cash flow diagrams visually represent income and expenses over some time interval.
For example, consider a truck that is going to be purchased for $55,000. It will cost $9,500 each
year to operate including fuel and maintenance. It will need to have its engine rebuilt in 6 years
for a cost of $22,000 and it will be sold at year 9 for $6,000. Here is the cash flow diagram: