Cash Flow Analysis Construction Engineering 221 Economic Analysis

advertisement
Cash Flow Analysis
Construction Engineering 221
Economic Analysis
Cash Flow Analysis
• Assumptions
–
–
–
–
–
–
–
Year end convention is robust
Interest rates are real (no inflation)
Taxes are excluded
Interest rates are constant over term
Omit non-quantifiable factors
Funds for investment are available
Unused funds are invested at equal return
Cash Flow Analysis
• Equivalence
– Method for comparing projects whose timing
and magnitude of receipts and disbursements
differ
– Allows for the time value of money ($100
today is worth $105 one year from now at
i=5%) therefore- the values are equivalent
– Time value of money is represented by the
effective interest rate. Convention is to use
annual rates, although can be done qtr, daily,
Cash Flow Analysis
• Working backwards from a known future
disbursement is called discounting (think of it as
interest in reverse)
• Single payment equivalence (simplest case)
* P = present amount
* F = future amount
* t = time
* n = number of periods
* i = effective interest rate
Cash Flow Analysis
• Future worth of a present sum is:
– F = P(1 + i)n
– (1 + i)n is the compounding factor and is
contained in the tables in the back of the book
for various rate and terms
– Example- if I buy (today) $250,000 worth of 30
year bonds at 5% interest, how much will I get
at maturity?
• F = 250,000 X 4.3219 = 1,080,475 (table p. 112)
Cash Flow Analysis
• Present worth of a future sum is:
* P = F/(1 + i)n
• 1/(1 + i)n is called the present worth factor or the
discount rate
• Example: If you want to be a millionaire by the time
you are 50 years old, how much should you invest now
(assume you are 20 years old and the effective interest
rate is 5%)
• P = 1,000,000 X .2314= $231,400 (see table p. 112)
Homework
• Due Monday March 3
– Problems on worksheet handed out in class
Download