Cash-Flow Concepts

Cash flow is the stream of monetary (dollar) values— costs (inputs) and benefits (outputs)—resulting from a project investment.

Time Value of Money

The following are reasons why $1000 today is “worth” more than $1000 one year from today:

1.   Inflation

    2.   Risk

3.   Cost of money

Of these, the cost of money is the most predictable, and, hence, it is the essential component of economic analysis. Cost of money is represented by (1) money paid for the use of borrowed money, or (2) return on invest-ment. Cost of money is determined by an interest rate.

Time value of money is defined as the time-dependent value of money stemming both from changes in the pur-chasing power of money (inflation or deflation) and from the real earning potential of alternative investments over time.