Drawing a Cash Flow Diagram.

The cash flowdiagram shows when all cash flows occur. Look at Figure 2-7 and the $100 positive cash flowat the end of period 2. Fromthe time line one can see that this cash flow can also be described as occurring at the beginning of period 3. Thus, in a CFD the end of period t is the saI}letime as the beginning of period t + 1. Beginning-of-period cash flows (such as rent, lease, and insurance payments) are thus easy to handle: just draw your CFD and put them in where they occur.Thus O&M, salvages, revenues, and overhauls are assumed to be end-of-period cash flows.

The choice of time 0 is arbitrary. For example, it can be when a project is analyzed, when funding is approved, or when construction begins. When construction periods are assumed to be short; first costs are assumed to occur at time 0, and the first annual revenues and costs start at the end of the first period.When construction periods are long, time 0 is usually the date of commissioning-when the facility comes on stream.

 

FIGURE 2-7 An example cash flow diagram(CFD).

Perspective is also important when one is drawing a CFD. Consider the simple transaction of paying $5000 for some equipment. To the firm buying the equipment, the cash flow is a cost and hence negative in sign. To the firm selling the equipment, the cash flow is a revenue and positive in sign. This simple example shows that a consistent perspective is required when one is using a CFD to model the cash flows of a problem. One person's cash outflowis another person's inflow.

Often two or more cash flows occur in the same year, such as an overhaul and an O&M expense or the salvage value and the last year's O&M expense. Combining these into one total cash flowper year would simplify the cash flowdiagram. However, it is better to show each individually, to ensure a clear connection from the problem statement to each cash flowin the diagram.