Multiple Uneven cash flow basic concept
MULTIPLE UNEVEN
CASH FLOW
Cash Flow Time Line
Future Value(FV):The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate.
Present Value(PV):The value today of a future cash flow or series of cash flows.
Compounding : The process of going to future values
(FVs) from present values (PVs) is called compounding.
Present Value of Multiple Uneven Cash
Flow
Investment made do not yield constant periodic cash flow
Most cases firm receives stream of uneven cash flows
Where
Ct is Cash flow in period t, i is rate of interest n= number of years
Example
Consider that an investor has an opportunity of receiving Rs 1000, Rs
1500, Rs 800 and Rs 400 respectively at the end of one year through five years
Find out the present value of this stream of uneven cash flow.
The investor’s required interest is 8%
The Present Value can be calculated as follows PV=1000/(1.08)+1500/(1.08)2+800/
(1.08)3+1100/(1.08)4+400/(1.08)5 =
3927.60
PV=C1/(1+i)+C2/(1+i)2+C3/
(1+i)3+………+Ct/
(1+i)t=∑CFt/(1+i)t
Future Value of Multiple Uneven Cash
Flow
The future value (FV) compounding interest formula for each period and then sum them all together.
•Where
CFt is the cash flow occurring at time t
i is the interest rate per period
n is the number of period
Example
Suppose Mr X deposits each year Rs 500,
Rs 1000, Rs 1500, Rs 2000 and Rs 2500 in his saving bank account.
The interest rate is 5% yearly.
He wishes to find the future value of his deposits at the end of 5th year.
End of Amount
Number of years Compound
Future
year deposited compounded interest factor Value
Col (1)
Col(2)
Col(3)
Col(4)
(2) X (4)
1
500
4
1.216
608
2
1000
3
1.158
1158
3
1500
2
1.103
1654
4
2000
1
1.05
2100
5
2500
0
1
2500
FV=500 X (1.05)5+1000 X (1.05)4+1500 X
(1.05)3+2000 X (1.05)1+2500 X (1.05)0 = 8020.5
Thank You
CASH FLOW
Cash Flow Time Line
Future Value(FV):The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate.
Present Value(PV):The value today of a future cash flow or series of cash flows.
Compounding : The process of going to future values
(FVs) from present values (PVs) is called compounding.
Present Value of Multiple Uneven Cash
Flow
Investment made do not yield constant periodic cash flow
Most cases firm receives stream of uneven cash flows
Where
Ct is Cash flow in period t, i is rate of interest n= number of years
Example
Consider that an investor has an opportunity of receiving Rs 1000, Rs
1500, Rs 800 and Rs 400 respectively at the end of one year through five years
Find out the present value of this stream of uneven cash flow.
The investor’s required interest is 8%
The Present Value can be calculated as follows PV=1000/(1.08)+1500/(1.08)2+800/
(1.08)3+1100/(1.08)4+400/(1.08)5 =
3927.60
PV=C1/(1+i)+C2/(1+i)2+C3/
(1+i)3+………+Ct/
(1+i)t=∑CFt/(1+i)t
Future Value of Multiple Uneven Cash
Flow
The future value (FV) compounding interest formula for each period and then sum them all together.
•Where
CFt is the cash flow occurring at time t
i is the interest rate per period
n is the number of period
Example
Suppose Mr X deposits each year Rs 500,
Rs 1000, Rs 1500, Rs 2000 and Rs 2500 in his saving bank account.
The interest rate is 5% yearly.
He wishes to find the future value of his deposits at the end of 5th year.
End of Amount
Number of years Compound
Future
year deposited compounded interest factor Value
Col (1)
Col(2)
Col(3)
Col(4)
(2) X (4)
1
500
4
1.216
608
2
1000
3
1.158
1158
3
1500
2
1.103
1654
4
2000
1
1.05
2100
5
2500
0
1
2500
FV=500 X (1.05)5+1000 X (1.05)4+1500 X
(1.05)3+2000 X (1.05)1+2500 X (1.05)0 = 8020.5
Thank You