## Example

A car leasing company buys a car from a wholesaler for \$24,000 and leases it to a customer for four years at \$5,000 per year. Since the maintenance is not included in the lease, the leasing company has to spend \$400 per year in servicing the car. At the end of the four years, the leasing company takes back the car and sells it to a secondhand car dealer for

\$15,000. For the moment, in constructing the cash flow diagram, we will not consider tax, inflation, and depreciation.

Step 1:

Draw the horizontal axis to represent 1,2,3, and 4 years. Step 2:

At time zero, i.e., the beginning of year 1, the leasing company spends \$24,000. Hence, at time zero, on the horizontal axis, a downward arrow represents this number.

Step 3:

At the end of year 1, the company receives \$5,000 from his customer. This is represented by an upward arrow at the end of year 1. The customer also spends \$400 for maintaining the car; this is represented by a downward arrow.

The situations at years 2 and 3 are exactly the same as year 1 and are the presentations on the cash flow diagram exactly as for the first year.

Step 4:

At the end of the fourth year, in addition to the income and the expenditure as in the previous years, the leasing company receives \$15,000 by selling the car. This additional income is represented by an upward arrow.

The project ends at this time, so we have nothing else to insert in the cash flow diagram. We have represented all the costs and benefits in the cash flow. At this point, it is a good idea to go back through the life of the project and make sure that nothing as expressed in the description of the project is left out.