Cashflow Timelines

In: Business and Management

Submitted By taimur91
Words 2601
Pages 11
20/09/2011

4.1 The Timeline
Chapter 4 The Time Value of Money • A timeline is a linear representation of the timing of potential cash flows. • Drawing a timeline of the cash flows will help you visualize the financial problem.

Copyright © 2011 Pearson Education. All rights reserved.

Copyright © 2011 Pearson Education. All rights reserved.

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4.1 The Timeline (cont’d)
• Assume that you made a loan to a friend. You will be repaid in two payments, one at the end of each year over the next two years.

4.1 The Timeline (cont’d)
• Differentiate between two types of cash flows
– Inflows are positive cash flows. – Outflows are negative cash flows, which are indicated with a – (minus) sign.

Copyright © 2011 Pearson Education. All rights reserved.

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Copyright © 2011 Pearson Education. All rights reserved.

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20/09/2011

4.1 The Timeline (cont’d)
• Assume that you are lending $10,000 today and that the loan will be repaid in two annual $6,000 payments.

Textbook Example 4.1

• The first cash flow at date 0 (today) is represented as a negative sum because it is an outflow. • Timelines can represent cash flows that take place at the end of any time period – a month, a week, a day, etc.

Copyright © 2011 Pearson Education. All rights reserved.

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Copyright © 2011 Pearson Education. All rights reserved.

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Textbook Example 4.1 (cont’d)

4.2 Three Rules of Time Travel
• Financial decisions often require combining cash flows or comparing values. Three rules govern these processes.
Table 4.1 The Three Rules of Time Travel

Copyright © 2011 Pearson Education. All rights reserved.

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Copyright © 2011 Pearson Education. All rights reserved.

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20/09/2011

The 1st Rule of Time Travel
• A dollar today and a dollar in one year are not equivalent. • It is only possible to compare or combine…...

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