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Cash Flow Diagrams
Practice Quiz Engineering Costs and Cost Estimating ENGINEERING
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Cash Flow Dlagrams ECONOMIC ANALYSIS
1. Making Economic
Decisions
Go to questions COvering topic below
2. Engineering Costs and
Cost Estimating Cash flow diagrams visually represent income and expenses
Eng1neering Costs over some time interval. The diagram consists of a horizontal
Cust Estimating and line with markers at a series of time intervals. At appropriate
Estimating Models times, expenses and costs are shown.
Cash Flow Diagrams
Note that it is customary to take cash flows during a year at the
S. Interest andEquivalence end of the year, or EOY (end-of-year).There are certain cash
4, More Interest Formulas flows for which this is not appropriate and must be handled
5. Present Worth Analysis differently. The most common would be rent, which is normally
6. Annual Cash Flow taken at the beginning of a cash period. There are other pre
Analys1s paid flows which are handled similarly.
7. Rate of Return Analysis For example, consider atruck that is going to be purchased for
7A. Difficulties in Solving $55,000. It willcost $9,500each year to operate including fuel
for an Interest Rate
and maintenance. It will need to have its engine rebuilt in 6
11. Depreciation years for a cost of $22,000 and it will be sold at year 9 for
12. Income Taxes $6,000. Here is the cash flow diagram:
Excel® Video Tutorials
Excel® Spreadsheets S6000
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Cases in Engineering
Economy
EOY 1 2
Skrg (Res(e)
vale

S9500 Annnal
operating cost
$22,000
Contact Your Sales Rep Rebld cost
Higher Education Comnment
Card $55,000
hial Cost

Cash How Note that the initial cost, the purchase price, is recorded at the
beginning of Year 1, sometimes referred to as end-of-year 0, or
Fomula
EOY 0. Also,operating and maintenance costs actually will occur
it is the tot during a year, but they are recorded at EOY, and so forth. NeFTCI-TCO
Engineering Costs and Cost Estimating
qynewt of money Cash Flow Diagrams
whe, NCf- Met Casl Hou
boing 4ansferrd Question 1
Teo-10h atoutHo
into and tut of Return to Cash Flow Diagrams

Return to Engineering Costs and Cost Estimating Tutornals menu

buine,oves q Return to Tutorials menu

cetin permod ot Question 1.

fme Given the cash flow diagram below, answer the questions by
clicking on the correct answer. Note that there are several
questions; as you correctly answer each, you go to the next

Pesihve it outtas dceed infous, it 8 nesahve

question. (Note that these questions will take more time than
previous questions did.)

4$36,000
EOY 1 2 3 4 8

$19,500
$122,000

$175,000
[Link] is the initial cost of this new machine?

1.A $122,000
1.B $19,500
1.C$175,000
1.D $36,000
[Link] is the rebuild cost of the machine?

2.A $122,000
2.B $19,500

2.C $175,000
2.D $36,000
[Link] is the salvage value for the machine?

3.A$122,000
3.B $19,500

3.C$175,000
3.D $36,000

[Link] what single year is the total combined value of the

machine positive?
4.A 2

4.B4

4.C6

4.D9

Choose an option below.

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Review topic
 Time Value of Money (TVM): What Is It? (With
Examples)
Written by Indeed Editorial Team
Updated June 7, 2025

"TEis he Concept thad money available af he seud ttme is wodl

Thore thow the'same omount in he utue due to its poBenhal

The purnhaying
Poueromony
doclines

Eonomy)

The time value of money (TVM) is a basic concept that can help you make financial
decisions. TVM can help you decide how to best allocate funds for maximum value. When
Vouunderstand thisconcept, you candetermine the value of money today as it
compares
to that same amount in the future and determine the worth of different
investment options
based ontheir interest.
Formula for calculating the time value of money
The general formula to calculate the time value of money consists of the following
variables:

O Aitvre valye = preut Valye t nkyest

. FV= Future value of money

PV = Present value of money

" /= Interest rate per period (also called the discount rate)

" n=Number of compounding periods of interest per year

Comgoundinga the pnes
time the money is held
unt ofof time
" t= Number of years or amount held talewahng he hihe Value
of taltulabz
sfrom a siven pyese uws
Using these variables, the formula for TVM is:
is Called as compoundi.
Future value =Present value x [1+(Interest rate / Number of compounding periods)]
^(Number of compounding periods xNumber of years) i-ntere-nTime
FV=PVx\[1 +(i/n)\]^ (n xt)

Similarly, youcan rearrange the formula to findthe present value of future money:
PV =FV/\[1+ (i/n)\J^ (nxt)

Related: Present Value vs. Net Present Value: Definitions and Differences 3
= \0000d1o03)
Examples of the time value of money 1p000 OXI26
-|26000-
The following examples demonstrate how to calculate the time value of moñey:
Example1
Arelative has offered to give you $8,000 andasks if you would rather receive the money
today or wait two years. To ensure that getting the$8,000 today is worth more than it you
waited, you can calculate its future value. If you decide to take the $8,000 and invest in an
account at an annual rate of 6%, you would use the following calculation to discover its
worth in two years:

By usingthe standardtime value of moneyformula, FV= PVx |[1+ (i/n)l]^(nxt), you can
input the following variables.:

PV= $8,000

. j=6% or 0.06

n=1, since the interest rate is applied once a year

" t=2

The result would look like this:

FV= $8,000 x\[1+(6%/1)\] ^(1 x2)

FV= $8,000 x(1+0.06) ^2

FV= $8,988.80 (49)

In two years, your $8,000 investment will be worth $8,988.80. Youcan see that it is more
valuable to take the $8,000 today rather than wait two years to receive $8,000 because it
gives you $988.80 more.

Related: How To Calculate Future Value (With Examples)

Example2

To determine the present value of the $8,000in two years, you could use the same interest
rate as before. Your calculation would look like this:

PV=$8,000/[1 +(0.06/1)] ^(x2)

pV= $719.97 (al42)

 Jndeses Roles

Simplevs. Compound Interest: An Overview

money
Interest isdefined as the cost of borrowing monev,. Itcan also be the rate paidfor
Interest can becalculated in two
On deposit, as in the case of a certificate of deposit.
ways:simple interest or compound interest.
of a loan.
Simple interest is calculated on the principal, or original, amounttheaccumulated
amount and interest
Compound interest is calculated on the principal
referred toas "interest on interest."
of previous periods and can, therefore, be
ifinterest is
amount of interest payable on a loan
There can be a big difference in the
calculated on a compound basis rather than on a
simple basis. Butthe magic of
compounding can work to your advantage when
it comes to yourinvestments. It can be
apotent factor in wealth creation.

KEY TAKEAWAYS

Interest can refer to the cost of borrowing money

in the form of interestcharged on a
loan or to the rate paid for money on deposit.
amount in thecase of a loan.
Simple interest is only charged on the original principal
theinterest rate and
Simple interest is calculated by multiplying the loan principal by
then by the term of a loan.
accelerated rate.
Compound interest multiplies savings or debt at an
principaland all of the
Compound interest is interest calculated on both the initial
previously accumulated interest.

Simple Interest Formula (2hnteest Aimowt)

The formula for calculating simple interest is:
Simple Interest-P x Ixn
Where, P= Pricipal, I= Interest Rate, n =Term of the loan/Years A= P+5F 1oh hmwt

Example: The total amount of interest payable by the borrower is calculated as $10,000 x
0.05 x 3 = $1,500if simple interest is charged at 5% on a $10,000 loan that's taken out for
three years. Interest on this loan is payable at $500 annually or $1,500 over the three
year loan term.

Compound Interest Formula

The formula for calculating the total amount paid on a loan with compound interest is:
A=P(1+r/n)nt

C-f A-P (Amoutpá

A
Where: A = Final amountP= Initial principal balance r = Interest rate 1 = Number O
times interest applied per time period t =Number of time periods elapsed
Compound Interest equals the total amount of principal and interest in the future,
or future value, less the principal anmount at present, referred to as present value( )
of cash flows given a
PV 1s the current worth of a future sum of money or stream
specified rate of return.
interest example be if it was charged
What would the amount of interest in the simple
on a compound basis?
Interest = $10, 000(1+ 0.05)- 1) 3 = $10, 000(1.157625 - 1) = $1, 576.25
 What is Inflation?
Inilaton is agradual loss of purchasing power that
the prices of goods and services over time. results in a significant increase in
The inflation rate is calculated by
the price increases of abasket of selected averaging
goods and services over a year. High intlation
means that prices are rising rapidly, whereas low
more slowly. inflation means that prices are rising

Deflation: Inflation can be distinguished from deflation,

which occurs when prices fall
while purchasing power rises.

Inflation Types
Inflation is categorised based on the rate and causes
of price increases. By rate, it
includes
creeping, walking, galloping, and hyperinflation. By causes, it
demand-pull, cost-push, structural, and protein inflation. comprises
Types of Inflation Based on Rate
Inflation is categorised by the rate at which prices
increase. Based on rate, inflation can
be classified as creeping inflation, walking inflation
inflation (Hopping or Running Inflation), or hyperinflation.(Trotting Inflation), galloping
Creeping Inflation (Mild or Low Inflation): A gradual
than 3% annually, which is considered increase in prices, usually less
demand and investment. manageable and may positively stimulate

Walking Inflation (Trotting Inflation): Prices

around 3% to 10% per year. Ifunchecked, it increase at a moderate pace, gernerally
can lead to economicoverheating.
Galloping Inflation (Hopping or Running Inflation):
increase rapidly at double -or triple-digit This inflation occurs when prices
annual rates, between 10% and 50%. It
disrupts economic stability and can severely
affect consumer purchasing power.
Hyperinflation: An extreme form of inflation where
Hyperinflation can decimate a currency's value, as prices rise over 50% monthly.
seen historically in Zimbabwe and
Germany's Weimar Republic.
 Measures to Control Inflation
Measures to control inflation include adjusting interest rates, reducing government
spending, boosting supply efficiency, and employing exchange rate policies, price
controls, and subsidies to stabilise prices and maintain economic stability.

Monetary Policy Measures: The Monetary Policy Committee is entrusted with fixing
the benchmark policy rate required to contain inflation within the specified target level.
As per the revised monetary policy ramework, the Government has fixed the inflation
target of 4% with a tolerance level of +/2 per cent.
RBI may also use qualitative control methods, such as raising margins on loans for
commodities that traders tend to speculate on and hoard.
The Reserve Bank of India may also resort to other operations, such as Open Market
Operations, to remove liquidity from the market by selling government securities and
bonds.

Fiscal Measures: The government can take two routes to bring down prices through
this method. It can cut down its spending on various schemes, projects etc. It can
increase taxes (either directly or indirectly).
Supply-Side Policies: These aim to increase production efficiency.
By
improving infrastructure, encouraging innovation, and removing regulatory barriers,
supply-side policies help reduce production
inflation. costs, thercby controlling cost-push

Exchange Kate Policy: A strong currency can reduce import prices,

services cheaper. Governments may intervene in the making goods ana
foreign exchange market tO
stabilise the currency, indirectly controlling inflation through
lower import costs.
Price Controls and Subsidies: Temporary price controls on essential goods
can help
limit inflation. Governments mav also provide subsidies to reduce the cost of essential
products like food and fuel, stabilising prices in the short term.
Targeted Interventions: In cases of specific inflationary pressures, such as food inflation,
governments may release buffer stocks or modify import policies to ensure adequate
supply, addressing price rises in critical sectors.... Read more at:
 Meaningof TVM
The time value of money (TVM) is the
Concept that money available at the
present time is worth more than the
identical sum in the future due to its
potentialearning capacity.

Why does the Value of Money Decline?

The value of money declines due to the

Combined impact of the following:
1 Inflation in the economy.
2. Risks involved in delayed receipts of cash
or finanial transactions, and
3. Opportunity cost of capital delayed.
4. Consumption
 Techniques of Time Value of Money

1. Compounding Techniques / Future

Value Techniques
2. Discounting Techniques/ Present
Value Techniques

Present Value (PV): Standsfor the

money in today's value of the
terms.
Future Value (FV): Standsfor the
received in the future. amount of cash
risthe discount rate or the
decline in value is happening. speed at which the
t:tis the time period in which
cash is received. the future value or
 Basic formula for calculating FV & PV

FV, = PV*(1+r)t
FV
PV, = (L+r)t

EXAMPLE- 1
Q. If you deposit Rs. 55,650 in a bank which is paying a
2% of interest on a ten year time deposit, how much
would the deposit grow at the end of ten year?
FV= PV"(1+r)
FV0 =Rs. 55,650 (1+0.12)10
FV0 =Rs. 55,650 (1,12)10
FV0 =Rs. 55,650X 3.106
FVo =Rs. 1,72,848.90
 EXAMPLE - 2
Q. Mr, B has been given an opportunity to receive
Rs. 20,000 six years from now. If he can earn 10% on his
investment, what is the most he should pay for the
opportunity?
PV = FV/(1+r)
PV = Rs. 20,000/(1+0.10)
PV = Rs. 20,000 / (1.10)
PV =Rs. 20,000/1.771561
PV = Rs. 11,289.47
Adam >lmitk - mg"An kovglwry ink Ahe Nalhve and tauses wealk of Naton"
"Econe MI}) is a Siene of wealPa."
What is Economics?

Economics is the social science that studies how people make choices in
the face of scarcity. It examines how individuals, businesses,
governments, and nations allocate limited resources to satisfy their
needs and wants. Essentially, it's the study of how societies organize
themselves to produce, distribute, and consume goods and services.
Definition of Economics:
Economics is the study of mankind in the ordinary business of life.
- Alfred Marshall

Economics is the science which studies human behaviour as

relationship between ends and scarce means which have alternative
uses.
-Lionel Robbins

The theory of economics is a method rather than a doctrine, an

apparatus of mind, atechnique of thinking, which helps its possessor to
draw correct conclusions.
-John Maynard Keynes
Core Concepts:
Scarcity: The fundamental problem in economics is that resources (like
time, money. natural resources) are limited, while human wants are
virtually unlimited.
Choice: Because of scarcity, people, businesses, and governments must
make choices about how to allocate their resources.
Allocation: Economics studies how resources are distributed among
different uses and users.
Production: How qoods and services are created.
Distribution: How those goods and services are made available to
consumers.
Consumption: How goods and services are used.
Core Areas of Economics:
Microeconomics:
This branch focuses on the behavior of individual economic agents like
consumers, firms, and industries, examining how they make decisions
about resource allocation, production, and consumption.
Macroeconomics:
Macroeconomics analyzes the overall performance and behavior of
national economies, including topics like inflation, unemployment,
economic growth, and the role of government policy.
Econometrics:
This field uses statistical methods to analyze economic data, test
economic theories, and make predictions about economic phenomena.
Development Economics:
This area studies the economic growth and development of
countries,
particularly those with low income levels, focusing on issues like
poverty reduction, inequality, and sustainable development.
International Economics:
This specialization examines the economic
interactions between
countries, including international trade, foreign investment,
and
exchange rates.
Public Finance:
This area studies the role of government
in the
taxation, government spending, and public goods. economy, including
 Financial Economics:
This field focuses on the functioning of financial markets, including
investments, portfolio management, and the pricing of financial
assets.

Mathematical Economics:
This area utilizes mathematical models and tools to analyze and
understand economic phenomena.
Game Theory:
This branch analyzes strategic decision-making in situations where
the outcome for one individual depends on the choices of others.

Other Related Subjects:

History of Economic Thought: Explores the evolution of economic
ideas and theories over time.
Behavioral Economics: Studies the psychological and cognitive factors
that influence economic decision-making.
of
. Environmental Economics: Examines the economic aspects
environmental issues, such as pollution, resource management, and
climate change.
Labor Economics: Focuses on the labor market, including topics like
wages, employment, unemployment, and labor unions.
Urban Economics: Studies the economic aspects of cities, including
land use, transportation, and urban development.
Agricultural Economics: Examines the economics of agriculture and
food production.
Why is it important?
Economics provides valuable insights into how societies function and
how toaddress various economic challenges. It helps us understand:
How markets work.
The impact of government policies on the economy.
How to make better decisions about personal finances and investments.
Thecauses of economic problems and potential solutions.
The forces driving global trade and economic development.
ECONOMIC SYSTEM

An Arrangement of Solving CENTRAL PROBLEMS of an Economy

3. For Whom to Produce?

1. What to Produce? 2. How to Produce?

Relates to selection of
Relates to part of society
Relates to Selection of for whom goods are to
goods to be produced technique of production
be produced

-
According to market
Analysis
Labour intensive Capital intensive According to According to
Technique Technique Distribution Availability of
of Income Resources
As per Consumer's
Demand
Use of more Use of more
Labour than Capital than
Capital Labour

Labour > Capital Capital > Labour

 Types of Economies
Enotes World

Un thebasis stage of
On the basis of nature of economic system
devalopment

Developed Develoging Canitalism Socialism Mixed econonmy

economies economies

What is Engineering Economics?

Engineering economics isa specialized field that applies economic

principles to engineering decision-making. It helps engineers evaluate the
financial aspects of different technical solutions, ensuring they are both
technically sound and economically viable. Essentially, it provides the tools
and framework for making rational, cost-effective decisions in

engineering projects and systems.

Key aspects of engineering economics:

Decision- making:
It focuses on evaluating different alternatives and selecting the best
one based on economic criteria.
Cost analysis:
It involves assessing the costs associated with various engineering
solutions, including initial investment, operating costs, and potential
future expenses.
Benefit assessiment:
It considers the benefits derived from each alternative, such as
increased revenue,reduced expenses, or improved efficiency.
 Time value of money:
LT recognizes that money has a time value, meaning that a dollar today is
worth more than a dollar in the future due to factors like interest and
inflation.
.Risk and uncertainty:
It helps in evaluating and managing the risks associated with different
engineering projects.

Why is it important?
" Efficient resource allocation:
Engineering economics helps ensure that resources are used efficiently
and effectively.
Project justification:
It provides the basis for justifying engineering projects to stakeholders
by demonstrating their economic feasibility and potential return on
investment.

Optimizing designs:
It allows engineers to optimize designs by considering the economic
implications of different design choices.
. Informed decision-making:
It empowers engineers to make well-informed decisions that consider
both technical and economic factors.

Sustainable development:
It contributes to sustainable development by promoting the efficient
use of resources and minimizing environmental impact.
In essence, engineering economics bridges the gap between technical
expertise and economic considerations, enabling engineers to make sound
judgments that benefit both their organizations andsociety as a whole.
 ouomls

noduct poliy , Salo mmchon and Madtot stakegy.

Dematd halys and torecahng
) Cost Anal-s