Cash flow diagrams visually represent income and expenses over some time interval. The diagram consists of a horizontal line with markers at a series of time intervals. At appropriate times, expenses and costs are shown.
Note that it is customary to take cash flows during a year at the end of the year, or EOY (end-of-year). There are certain cash flows for which this is not appropriate and must be handled differently. The most common would be rent, which is normally taken at the beginning of a cash period. There are other pre-paid flows which are handled similarly.For example, consider a truck that is going to be purchased for $55,000. It will cost $9,500 each year to operate including fuel and maintenance. It will need to have its engine rebuilt in 6 years for a cost of $22,000 and it will be sold at year 9 for $6,000. Here is the cash flow diagram:
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 EOY 0. Also, operating and maintenance costs actually will occur during a year, but they are recorded at EOY, and so forth.
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 question. (Note that these questions will take more time than previous questions did.)
1.What is the initial cost of this new machine?
2.What is the rebuild cost of the machine?
3.What is the salvage value for the machine?
4.In what single year is the total combined value of the machine positive?
Choose an option below.