Lecture 4 - Foundation of Engineering Economy - Cash Flow - Present Worth

Oct 26, 2026

Engineering Economy lecture 4 covers the concept and modeling of cash flow in project financial records. It defines cash flow as receipts and disbursements, explains cash flow diagrams using a time line with arrows for expenses and receipts, and introduces the year-end and end-of-period conventions. The lecture also distinguishes cash inflows and outflows, calculates net cash flow for each period, discusses point and range estimates, and works through a rental-compressor example to construct a cash flow diagram and locate present worth at year 0.

LanguageEnglish

CategoryExam

FormatPDF

Pages8

Reading Time20 min

AccessFree to download

Cash Flow

Cash flow definitions and diagrams

Year-end and end-of-period conventions

Cash inflows, outflows, and net cash flow

Estimating cash flows: point and range estimates

Example: rental company cash flow diagram and present worth

University of Diyala Engineering Economy Lecture 4 3rd Stage Communication department / Engineering collage Lecturer Marwa Mohammed Chapter 1 Foundation of Engineering Economy Cash Flow Cash flow is the sum of money recorded as receipts or disbursements in a project’s financial records. A cash flow diagram presents the flow of cash as arrows on a time line scaled to the magnitude of the cash flow, where expenses are down arrows and receipts are up arrows. Year-end convention ~ expenses occurring during the year are assumed to occur at the end of the year. Cash Flows: Terms and Estimating • Cash inflows are the receipts, revenues, incomes, and savings generated by project and business activity. A plus sign indicates a cash inflow. • Cash outflows are costs, disbursements, expenses, and taxes caused by projects and business activity. A negative or minus sign indicates a cash outflow. • Net cash flow (NCF)for each time period: Net cash flow = cash inflows-cash outflows NCF = R – D [3] • The end-of-period assumption : funds flow at the end of a given interest period Cash Flows: Terms and Estimating • Point estimate : A single value estimate of cash flow element of an alternative Cash inflow : income = %150000 per month • Range estimate – min and max values that estimate the cash flow cash flow out : cost in between $2.5 M and $3.2 M Cash flow diagrams • Cash flow diagrams visually represent income and expenses over sometime interval. • It is graphical representation of cash flows drawn on the y-axis and a timescale along x-axis. Cash flow diagrams Cash flow diagrams Example: A rental company spent $2500 on a new air compressor 7 years ago. The annual rental income from the compressor has been $750 . The $100 spent on maintenance the first year has increased each year by $25 . The company plans to sell the compressor at the end of next year for $150 . Construct the cash flow diagram from the company’s perspective and indicate where the present worth now is located. Solution Let now be time t = 0. The incomes and costs for years =7 through 1 (next year) are tabulated below with net cash flow computed using Equation [3] . The net cash flows (one negative, eight positive) are diagrammed in Figure . Present worth P is located at year 0.

FAQs

What is cash flow in engineering economy, and how is it recorded?

Cash flow is the sum of money recorded as receipts or disbursements in a project’s financial records. It captures both inflows and outflows across time periods.

How do year-end and end-of-period conventions affect cash flow timing?

The year-end convention assumes expenses occurring during the year are treated as occurring at the end of the year. The end-of-period assumption places funds flow at the end of a given interest period.

What is the net cash flow (NCF) for a time period?

Net cash flow for each time period is computed as cash inflows minus cash outflows (NCF = cash inflows - cash outflows).

Oct 26, 2026

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