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Format of money receipt for Engineering

Hello everyone, in this video we're going to talk about cash flow diagram. It is a very useful tool to graphically summarize a cash flow. In this slide here you're looking at a cash flow diagram. There are key elements to any cash flow diagram the first one is the horizontal line right here and that represents time so essentially this is time 0, time 1, time 2, time 3 and so forth. Those could be years months depending on the analysis period of your project. The other key element are the vertical arrows here. There are upward arrows and downward arrows. Upward arrows represents benefits, revenues, any inflow of cash and the downward arrows are negatives, basically outflow of cash expenses costs. There are two key roles associated with any cash flow that we're going to talk about one by one here. The first one, cash flows, cannot be added or subtracted unless they occur at the same periods in time. So look at the example. There is a cash flow here over four years. And in this case, in year 2, we have two cash flows. One positive for 2000 and one negative for 3000. So what we can do here is we can essentially cancel out these two cash flows. And in year 2, we only end up with $1,000 negative. The second rule is cash flows occurring during a period are counted at the end of the period, so essentially any cash flow that we're working with or end of the period of cash flows. So this is end of year 1, or this is end of year 3, and so forth. Different types of cash flows that we have, these are general categories. The first one is the first cost or the initial investment, typically an expense that you pay to buy an asset or any kind of machine, any costs. And that's a negative cash flow. Operations and maintenance costs, those are overtime and regular expenses to maintain an investment. And typically, you know, electricity labor or any minor repairs that you pay for them regularly, those are also costs or negative cash flows. Salvage value, that's the value of an asset at the end of its life. It's typically positive because you can sell that asset for some money and that's a salvage value. But it can be also negative if that asset means a disposal cost, so basically you need to pay in order to get rid of it. We also have revenues. Those are positive cash flows due to, you know, sales or anything positive cash flow that your business generates, so those are positive cash flows. We also have typically overall costs sometimes. Those are major expenses due to a certain repair or something. Let's look at this simple example and draw a cash flow diagram for it. A machine will cost $30,000 to purchase. Annual operating and maintenance costs will be $2000. The machine will save $10000 per year in labor costs. The salvage value of the machine after 5 years will be $7000. Draw the cash flow diagram. So let's start with the time horizon here. And as you can see, it's over five years. So year 1, 2, 3, 4, and 5. The initial investment is $30000 so that's a negative $30k. Then annual operating and maintenance costs will be $2000 each year so some $2000 cash flows over five years. The machine will save $10000 per year. So that's a savings, so that's a positive cash flow. So they have some $10000 here. Again, over 10 years, so $10K. and then there's a salvage value at the end of year 5 for $7000, so at the end of year 5 we have additional $7k that should be added to the cash flow. So this is a quick representation of this problem, and you can see the cash flow diagram is very powerful and summarizing the information. In this slide you see the same cash flow generated to summarize the problem. And in the next video, we're going to talk about the time value of money.