Engineering Economics Blog

Each year Exxon-Mobil expends large amounts of funds for mechanical safety features throughout its worldwide operations. Carla Ramos, a lead engineer for Mexico and Central

American operations, plans expenditures of $1 million now and each of the next 4 years just for the improvement of fi eld-based pressure-release valves. Construct the cash fl ow diagram to fi  nd the equivalent value of these expenditures at the end of year 4, using a cost of capital estimate for safety-related funds of 12% per year.

Solution

Figure 1–7  indicates the uniform and negative cash fl ow series (expenditures) for fi  ve periods, and the unknown   F  value (positive cash fl  ow equivalent) at exactly the same time as the fi  fth expenditure. Since the expenditures start immediately, the fi rst $1 million is shown at time 0, not time 1. Therefore, the last negative cash fl ow occurs at the end of the fourth year, when   Falso occurs. To make this diagram have a full 5 years on the time scale, the addition of the year 1 completes the diagram. This addition demonstrates that year 0 is the end-of-period point for the year 1.

Figure 1–7 Cash fl ow diagram, Example 1.9.