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Cash flow

Introduction

Simply put, cash flow is the movement of money in and out of a business, project or financial product. Measurements of cash flow can be used to evaluate the value of a given project, most commonly by listing all the costs and gains from the project over its lifetime. Figure 1 below shows the initial cost of an A++ fridge and the subsequent positive stream of annual energy savings.

cashflow.gif
Fig. 1 Cash flow. The initial investment is negative (year 0) while the savings each
following year are positive.


For example, if you were to invest in a new fridge you can choose between spending more money on an energy efficient fridge, saving in the long run, or buying a less efficient but cheaper fridge, saving in the short run. This is illustrated in the table below

Table 1. Comparison of fridges. Numbers are based on data from Elsparefonden.dk; the KWH price is assumed to be 2 DKK.

Brand Volume Classification Price KWH/year El. cost Savings relative to A++
name liters grade DKK KWH DKK DKK
Liebherr 156 A++ 4 069 84 168 -
Bosch 154 A+ 2 959 117 234 66
Liebherr 151 A 2 055 154 308 140

Prices from elsparefonden.dk and lavprisk√łkken.dk from the 10.12.2009.

Problem Statement

If you decided to invest in the most energy efficient fridge, classified as A++, then how long would it take before the savings from your electricity bill paid for the extra cost of the fridge? The simplest way to illustrate this is to simply compare the initial cost of the fridge against the saved energy costs over time. The saved energy cost can be considered a cash bonus, as it represents money you would otherwise have spent on the electricity bill. The initial cost of the fridge is a cash outlay, i.e. money you invest in a new product.

Simple Cash Flow


Table 2 below shows the relative cash flow over time for each of the three fridges. Energy savings are relative to the base case of buying the cheapest fridge, the Liebherr A model. Figure 1 above is the cash flow of the Liebherr A++ model.

Year Liebherr A++ [DKK] Bosch A+ [DKK] Liebherr A [DKK]
0 -4069 -2959 -2055
1 140 74 0
2 140 74 0
3 140 74 0
4 140 74 0
5 140 74 0
6 140 74 0
7 140 74 0
8 140 74 0
9 140 74 0
10 140 74 0
11 140 74 0
12 140 74 0
13 140 74 0
14 140 74 0
15 140 74 0
Total -1969 -1849 -2055


Note that in the 15th year, both the A++ fridge and the A+ fridge have ended up costing the owner less than the cheapest fridge.


Created by tanja.groth. Last Modification: Sunday 31 May 2020 21:20:55 CEST by jj.