02 Cash Flow Problem Set
CASH FLOW | PRACTICE PROBLEMS Complete the following to reinforce your understanding of the concept covered in this module.
PROBLEM 1: A CEO borrowed $1,500 from a bank at 6% interest to purchase a piece of equipment. It was the borrower’s intention to pay back half of the principle plus the interest that was due after the first year of the loan. At end of the second year, the borrower had the intention of paying off the remainder of the loan plus the interest incurred. Which of the following Cash Flow Diagrams best represents the cash flow from the view of his bank account?
A.
B.
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C.
D.
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SOLUTION 1: The TOPIC of CASH FLOW is not directly provided to us in the NCEES Supplied Reference Handbook, Version 9.4 for Computer Based Testing. However, it is of upmost importance that we understand the fundamental concepts and applications revolving around this subject independent of the NCEES Supplied Reference Handbook.
Our first step to solving this problem will be to determine the identity of each transaction. We can do this quickly using a table such that:
Year
Cash Flow
0
+$1,500
1 2
-$840 ($750 in Principle, $90 in interest) -$795 ($750 in Principle, $45 in interest)
The CEO received $1,500 at the beginning of year 1 which is illustrated as a credit to his account. At the end of year 1 he made a payment that consisted of half the principle ($750) plus the interest incurred over the first year of that principle, which at 6% was $90; this is shown as an expense at the year 1 mark. At the end of year 2 he made a payment that consisted of the remaining principle ($750) plus the interest incurred over the second year of that principle, which at 6% was $45; this is shown as an expense at the year 2 mark.
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by Prepineer | Prepineer.com
The next step is to summarize these expenses and credits in a graphical form on a cash flow diagram. We are analyzing over a 2-year period, so we can draw a horizontal line with marks representing 1-year periods.
Therefore, the correct answer choice is A.
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PROBLEM 2: An engineering company purchased a piece of equipment that would help them complete their Constructability Reviews. This piece of equipment had an upfront cost of $5,000 to purchase and was expected to return 4.5% annually on their original purchase price over the first 5 years. Assuming no maintenance costs were incurred over the first 5 years, which of the following cash flow diagrams best represents this scenario:
A.
B.
C.
D.
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by Prepineer | Prepineer.com
SOLUTION 2: The TOPIC of CASH FLOW is not directly provided to us in the NCEES Supplied Reference Handbook, Version 9.4 for Computer Based Testing. However, it is of upmost importance that we understand the fundamental concepts and applications revolving around this subject independent of the NCEES Supplied Reference Handbook.
Our first step to solving this problem will be to determine the identity of each transaction. We can do this quickly using a table such that:
Year
Cash Flow
0
-$5,000
1
$225 ($225is 4% of the original cost)
2
$225
3
$225
4
$225
5
$225
The original cost of the piece of equipment was $5,000, which is illustrated at the beginning of year 1 as an expense. At the end of year 1, the expected return on the investment begins to be realized, a receipt of $225, for the remainder of the defined period of 5 years. These receipts are illustrated on the Cash Flow Diagram as positive vertical arrows at annual increments.
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by Prepineer | Prepineer.com
The next step is to summarize these expenses and credits in a graphical form on a cash flow diagram. We are analyzing over a 5-year period, so we can draw a horizontal line with marks representing 1-year periods.
Therefore, the correct answer choice is C.
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by Prepineer | Prepineer.com
PROBLEM 3: A certain construction company purchased a tractor for $135,000. It is expected that it will cost the company 5% of this purchase price annually for various maintenance costs, but will save them $1,000 per month from what they are currently paying in rent for the same tractor. Which of the following Cash Flow Diagrams best represents the first two years of this scenario?
A.
B.
C.
D.
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by Prepineer | Prepineer.com
SOLUTION 3: The TOPIC of CASH FLOW is not directly provided to us in the NCEES Supplied Reference Handbook, Version 9.4 for Computer Based Testing. However, it is of upmost importance that we understand the fundamental concepts and applications revolving around this subject independent of the NCEES Supplied Reference Handbook.
Our first step to solving this problem will be to determine the identity of each transaction. We can do this quickly using a table such that: Year
Cash Flow
0
-$135,000 -$6,750 for 5% of purchase
1
price on maintenance +$12,000 for 12 months of savings at $1,000 per month
2
-$6,750 + $12,000
The original cost of the tractor was $135,000, which is illustrated at the beginning of year 1 as an expense. At the end of year 1, the 12 months of savings (receipts) for each month not having to pay rent is illustrated ($12,000). The maintenance costs are also illustrated as an annual expense of $6,750, or 5% of the original purchase price. These same costs are duplicated for year 2.
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by Prepineer | Prepineer.com
The next step is to summarize these expenses and credits in a graphical form on a cash flow diagram. We are analyzing over a 2-year period, so we can draw a horizontal line with marks representing 1-year periods.
Therefore, the correct answer choice is C.
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by Prepineer | Prepineer.com
PROBLEM 1: A CEO borrowed $1,500 from a bank at 6% interest to purchase a piece of equipment. It was the borrower’s intention to pay back half of the principle plus the interest that was due after the first year of the loan. At end of the second year, the borrower had the intention of paying off the remainder of the loan plus the interest incurred. Which of the following Cash Flow Diagrams best represents the cash flow from the view of his bank account?
A.
B.
Made with
C.
D.
by Prepineer | Prepineer.com
SOLUTION 1: The TOPIC of CASH FLOW is not directly provided to us in the NCEES Supplied Reference Handbook, Version 9.4 for Computer Based Testing. However, it is of upmost importance that we understand the fundamental concepts and applications revolving around this subject independent of the NCEES Supplied Reference Handbook.
Our first step to solving this problem will be to determine the identity of each transaction. We can do this quickly using a table such that:
Year
Cash Flow
0
+$1,500
1 2
-$840 ($750 in Principle, $90 in interest) -$795 ($750 in Principle, $45 in interest)
The CEO received $1,500 at the beginning of year 1 which is illustrated as a credit to his account. At the end of year 1 he made a payment that consisted of half the principle ($750) plus the interest incurred over the first year of that principle, which at 6% was $90; this is shown as an expense at the year 1 mark. At the end of year 2 he made a payment that consisted of the remaining principle ($750) plus the interest incurred over the second year of that principle, which at 6% was $45; this is shown as an expense at the year 2 mark.
Made with
by Prepineer | Prepineer.com
The next step is to summarize these expenses and credits in a graphical form on a cash flow diagram. We are analyzing over a 2-year period, so we can draw a horizontal line with marks representing 1-year periods.
Therefore, the correct answer choice is A.
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by Prepineer | Prepineer.com
PROBLEM 2: An engineering company purchased a piece of equipment that would help them complete their Constructability Reviews. This piece of equipment had an upfront cost of $5,000 to purchase and was expected to return 4.5% annually on their original purchase price over the first 5 years. Assuming no maintenance costs were incurred over the first 5 years, which of the following cash flow diagrams best represents this scenario:
A.
B.
C.
D.
Made with
by Prepineer | Prepineer.com
SOLUTION 2: The TOPIC of CASH FLOW is not directly provided to us in the NCEES Supplied Reference Handbook, Version 9.4 for Computer Based Testing. However, it is of upmost importance that we understand the fundamental concepts and applications revolving around this subject independent of the NCEES Supplied Reference Handbook.
Our first step to solving this problem will be to determine the identity of each transaction. We can do this quickly using a table such that:
Year
Cash Flow
0
-$5,000
1
$225 ($225is 4% of the original cost)
2
$225
3
$225
4
$225
5
$225
The original cost of the piece of equipment was $5,000, which is illustrated at the beginning of year 1 as an expense. At the end of year 1, the expected return on the investment begins to be realized, a receipt of $225, for the remainder of the defined period of 5 years. These receipts are illustrated on the Cash Flow Diagram as positive vertical arrows at annual increments.
Made with
by Prepineer | Prepineer.com
The next step is to summarize these expenses and credits in a graphical form on a cash flow diagram. We are analyzing over a 5-year period, so we can draw a horizontal line with marks representing 1-year periods.
Therefore, the correct answer choice is C.
Made with
by Prepineer | Prepineer.com
PROBLEM 3: A certain construction company purchased a tractor for $135,000. It is expected that it will cost the company 5% of this purchase price annually for various maintenance costs, but will save them $1,000 per month from what they are currently paying in rent for the same tractor. Which of the following Cash Flow Diagrams best represents the first two years of this scenario?
A.
B.
C.
D.
Made with
by Prepineer | Prepineer.com
SOLUTION 3: The TOPIC of CASH FLOW is not directly provided to us in the NCEES Supplied Reference Handbook, Version 9.4 for Computer Based Testing. However, it is of upmost importance that we understand the fundamental concepts and applications revolving around this subject independent of the NCEES Supplied Reference Handbook.
Our first step to solving this problem will be to determine the identity of each transaction. We can do this quickly using a table such that: Year
Cash Flow
0
-$135,000 -$6,750 for 5% of purchase
1
price on maintenance +$12,000 for 12 months of savings at $1,000 per month
2
-$6,750 + $12,000
The original cost of the tractor was $135,000, which is illustrated at the beginning of year 1 as an expense. At the end of year 1, the 12 months of savings (receipts) for each month not having to pay rent is illustrated ($12,000). The maintenance costs are also illustrated as an annual expense of $6,750, or 5% of the original purchase price. These same costs are duplicated for year 2.
Made with
by Prepineer | Prepineer.com
The next step is to summarize these expenses and credits in a graphical form on a cash flow diagram. We are analyzing over a 2-year period, so we can draw a horizontal line with marks representing 1-year periods.
Therefore, the correct answer choice is C.
Made with
by Prepineer | Prepineer.com
