Cash Flow Diagrams
For INFO 630 and 631
Dr. Jennifer Booker
June 17, 2015
This provides some clarification about the way cash flow diagrams are drawn, and the reasons behind
those rules.
Purpose: The purpose of cash flow diagrams is to show the net amount of money received or spent
during various time periods for a project. The time periods are typically given in months or years,
depending on the scope of the project.
Perspective: Cash flow diagrams can be drawn from the perspective of the borrower or the lender. In
our context, we are analyzing projects from the borrower's perspective, so make cash flow diagrams
from the borrower's perspective. What's the difference? The two perspectives make the diagram flip
upside down, since a gain for the borrower is a loss for the lender, and vice versa. Be careful, many
diagrams in the text are from the lender's perspective.
Calculations: For each time period, calculate the net amount of money gained or lost during each time
period.
Net cash flow = gains - losses = income - expenses
Gains or income include anything that gives the borrower money, such as taking out a loan, receiving
interest from an investment, receiving benefits from an operational system, etc.
Losses or expenses include any money leaving the borrower, such as loan payments, buying equipment
for cash, etc.
Creating the drawing: The cash flow diagram is a set of orthogonal arrows. The X axis is a timeline
arrow pointing to the right, labeled with the number of each time period (0, 1, 2, etc.). Each time period
is evaluated at the end of that time period, so pretend that all transactions in time period 2 are
accounted for at the end of time period 2. The end of Period 0 is the present time.
Positive net cash flows point up from the X axis, negative ones point down. The length of arrows should
be roughly proportional to their dollar value (I won't check with a ruler). Amounts of net cash flow
which are known at the start of the problem are labeled with that amount (such as $20k). Make sure
negative cash flows are labeled with negative dollar values. Zero net cash flows can either be labeled
with that amount $0 or that time period can be left blank. Labels can be above, below, or beside the
arrow they represent; generally somewhere near the arrowhead. When you have several identical time
periods with the same net cash flow, one label can be used for all of them.
For chapter 4, unknown amounts at the start of the problem are labeled with that word in parentheses
(unknown) regardless of sign. Do not fill in the final answer for that amount.
Example (see also page 111):
The cash flows for a project are as follows:
Period (years) Gains ($k) Losses ($k)
0
0
100
1
5
25
2
10
5
3
20
0
4
20
0
5
25
0
Find the net cash flow for each time period:
Period (years) Gains ($k) Losses ($k) Net cash flow ($k)
0
0
100
-100
1
5
25
-20
2
10
10
0
3
20
0
20
4
20
0
20
5
25
0
25
Then construct the diagram. I used MS Visio, but the tools in Word are adequate. Lines should be
proportional in length to their value.
$25k
$20k
0
1
$0
2
-$20k
-$100k
3
4
5