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Present Value and Future Value of Uneven Cash Flows

CFA® Exam Level 1

Time Value of Money (CFA L1) Present Value and Future Value of Uneven Cash Flows

We have looked at the PV/FV calculations for single sums of money and for annuities in which all the cash flows are equal. However, there may be an investment where the cash flows are not equal. We will now look at how to calculate the PV and FV of such an uneven series of cash flows.

Look at the following cash flows:

uneven

Assuming an interest rate of 8%, we will now calculate the present value and future value of this uneven series of cash flows.

 Calculator Usage: Future value
 To calculate the future value of this series of cash flows, we will need to treat each cash flow as an independent cash flow and calculate its future value. We will adopt the procedure that we used to calculate the future value of a single cash flow.

The following calculations are demonstrated using BA II Plus calculator.

FV1: PV = -500, N = 4, I/Y = 8. CPT > FV = -$680.244

FV2: PV = -600, N = 3, I/Y = 8. CPT > FV = -$755.827

FV3: PV = +1,000, N = 2, I/Y = 8. CPT > FV = +$1,166.400

FV4: PV = +1,500, N = 1, I/Y = 8. CPT > FV = +$1,620

FV5: PV = +2,000, N = 0, I/Y = 8. CPT > FV = +$2,000

Future Value of cash flows = Sum of all Future Values = $3350.328

 

 Calculator Usage: Present value
To calculate the future value of this series of cash flows, we will need to treat each cash flow as an independent cash flow and calculate its future value. We will adopt the procedure that we used to calculate the present value of a single cash flow.

PV1: FV = -500, N = 1, I/Y = 8. CPT > PV = -$462.963

PV2: FV = -600, N = 2, I/Y = 8. CPT > PV = -$514.403

PV3: FV = +1,000, N = 3, I/Y = 8. CPT > PV = +$793.832

PV4: FV = +1,500, N = 4, I/Y = 8. CPT > PV = +$1,102.545

PV5: FV = +2,000, N = 5, I/Y = 8. CPT > PV = +$1,361.166

Future Value of cash flows = Sum of all Future Values = $2280.177

The present value of the uneven series of cash flows can also be calculated using the Cash Flow (CF) key and NPV function.

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In this Course

Course Home
Introduction – Time Value of Money
Interest Rates
Interest Rate Equation
Nominal Interest Rate and Effective Yield
Time Value of Money for Different Compounding Frequencies
Future Value of a Single Cash Flow
Present Value of a Single Cash Flow
Future Value and Present Value of Ordinary Annuity
Present Value and Future Value of Annuity Due
Present Value of a Perpetuity
Present Value and Future Value of Uneven Cash Flows
Annuities with Different Compounding Frequencies
Using a Timeline to Solve Time Value of Money Problems
Time Value of Money Quiz 1 ( Reading 6, CFA Level I)
Return to Time Value of Money (CFA L1)

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