i've been reading about cash flow diagrams, disbursements and receipts. In the engineering economics textbook i'm...

i've been reading about cash flow diagrams, disbursements and receipts. In the engineering economics textbook i'm reading, its says " since earlier cash flows are more valuable than later cash flows, we cannot just add them together. Instead, each alternative is resolved into a set of cash flows".

1. can you try to help me understand the basic ideas of cash flows and cash flow diagrams? maybe provide a few basic examples to solidify the concept

2. please explain why we cannot just add them too

Expert Solution

Earlier cash flows are more valuable than later cash flows, we cannot just add them together.

Why earlier cash flows are more valuable than later cash flows?

Earlier cash flows are more valuable because of the Concept of the time value of money.

Simple Logical Question

I just want to ask a question to you, Do you think the Value of money is the same after 100 years ???

Your answer is No.

For Example, If you pay me $ 10000 Today, and I will pay back to you $ 10000 After 100 years. Are you ready with this deal? No because of Value of money will increase due to Inflation and many other economic factors.

Concept of Time value
Suppose you will invest $ 5000 in Indian Bank account with 8% Interest rate per annum then what is the value you will be received after 5 years?
Answer
Value at beginning invested	$ 5,000
Interest credited in account for the first year (5000*8%)	$ 400
Value at the end of the First year	$ 5,400
Interest credited in account for the second year (5400*8%)	$ 432
Value at the end of the second year	$ 5,832
Interest credited in account for the third year (5832*8%)	$ 467
Value at the end of the third year	$ 6,299
Interest credited in account for the fourth year (6299*8%)	$ 504
Value at end of the fourth year	$ 6,802
Interest credited in account for the Fifth year (6802*8%)	$ 544
Value at end of the Fifth year	$ 7,347

You will be received $ 7,247 after 5 years.
Now coming back to my question, You should never ready to received only $ 5000 after 5 years. Why ?? Answer is the time value of money.

Why we cannot just add them together?

Now suppose you will buy land today $ 100000 and further buy land $ 100000 after 50 years. Then you will now that land purchased after 50 years is lesser compared to older land in terms of quantity. It may be possible that the value of older land after 50 years maybe $ 2,000,000. Actually value of land available after 50 year is ( 2,000,000 old + 100,000 new $ 2,100,000. How can you simply add both amount like $100000+ $ 100000 = $200000 ?

ekkarill92 answered 6 months ago

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