2/20/13 Cash Flow Diagrams
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TVM Component Documentation Concepts Diagrams
Cash Flow Diagrams
A cash flow diagram is a picture of a financial problem that shows all
cash inflows and outflows plotted along a horizontal time line. It can
help you to visualize a financial problem and to determine if it can be
solved using TVM methods.
Constructing a CashFlow Diagram
The time line is a horizontal line divided into equal periods such as days,
months, or years. Each cash flow, such as a payment or receipt, is
plotted along this line at the beginning or end of the period in which it
occurs. Funds that you pay out such as savings deposits or leasepayments are negative cash flows that are represented by arrows
which extend downward from the time line with their bases at the
appropriate positions along the line. Funds that you receive such as
proceeds from a mortgage or withdrawals from a saving account are
positive cash flows represented by arrows extending upward from theline.
Example: You are 40 years old and have accumulated $50,000 in yoursavings account. You can add $100 at the end of each month to your
account which pays an annual interest rate of 6% compounded
monthly. Will you be able to retire in 20 years?
The time line is divided into 240 monthly periods (20 years times 12
payments per year) since the payments are made monthly and the
interest is also compounded monthly. The $50,000 that you have now
(present value) is a negative cash outflow since you will treat it asthough you were just now depositing it into the account. It is
Concepts
Introduction
Interest
Periods
Payments
Present Value
Single
Annuity
Future Value
Single
Annuity
Amortization
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Calculator
2/20/13 Cash Flow Diagrams
www.getobjects.com/Components/Finance/TVM/diagram.html 2/2
represented with a downward pointing arrow with its base at thebeginning of the first period. The 240 monthly $100 deposits are also
negative outflows represented with downward pointing arrows placed
at the end of each period. Finally you will withdraw some unknown
amount (the future value) after 20 years. Represent this positive inflow
with an upward pointing arrow with its base at the very end of the last
period.
This diagram was drawn from your point of view. From the bank's
point of view, the present value and the series of deposits are positive
cash inflows, and the final withdrawal of the future value will be a
negative outflow.
See the Future Value of an Ordinary Annuity page for the solution to
this problem.
Identifying TVM Problems
For a financial problem to be solved with time value of money formulas:
the periods must be of equal length
payments, if present, must all be equal and be all inflows or alloutflows
payments must all occur either at the beginning or end of a periodthe interest rate cannot vary along the time line
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