PV of Uneven Cash Flows
The cash flows generated from an investment can never be the same or even for the entire life of that investment. There will always exist some difference in the cash flow each year. It could be due to various reasons, say, changes in the economic cycle, increase/decrease in production, fluctuations in turnover and price, etc. Hence, the method of the present value of annuity does not work here. And this is where the role of the present value of uneven cash flows comes into play. PV of uneven cash flows calculator is developed to help one overcome the limitations of the present value of an annuity.
This calculator is made to simplify the complex calculation to arrive at the present value of uneven cash flows.
To know more about PV of uneven cash flows – Present Value of Uneven Cash Flows
In order to find out the present value of uneven cash flows, put your values in the following formula:
CF for Year 1 (1 + r)1 + CF for Year 2 (1 + r)2 + CF for Year 3 (1 + r)3 + ……. + CF for Year n (1 + r)n
Where, CF means Cash Flow for the respective years.
r = Discounting Rate
n = The period till calculation
About the Calculator / Features
PV of Uneven Cash Flows Calculator is an online and user-friendly tool. The user has to input the following details only.
- Cash flows
- Discounting rate
How to Calculate using Calculator
User have to input the following details into calculator for obtaining instant results.
Cash flows of different periods are to be inserted against their respective columns. It could be either negative or positive.
It is the rate at which the cash flows are discounted to obtain their present values.
Example: PV of Uneven Cash Flows
An example would help in clarifying the calculation of present value of uneven cash flows.
Mr. X has installed a machine in his factory with a view to generate higher revenues. Net cash flows due to installing such machinery are as follows:
|Net cash flows ($)||(1,250)||(1,000)||1,100||1,450||1,500|
He wants to calculate the present value of these cash flow at a discounting rate of 10%
PV of Uneven Cash Flows = (-1,250) (1 + 0.1)1 + (-1,000) (1 + 0.1)2 + (1,100) (1 + 0.1)3 + (1,450) (1 + 0.1)4 + (1,500) (1 + 0.1)5 = 785.39
A clear presentation of the same is as follows:
|Year||Net Cash Flows||PV of Factor $1 @ 10%||PV of Cash Flows|
The present value of uneven cash flows helps the investor in analyzing the profitability of an investment. In the example above, the total net cash flows are $1,800 while its present value is $785.39 only. If the investor makes a decision on the basis of net cash flows, it may suffer a huge loss. This simply means that the present value of cash out flows may be more than present value of cash inflows.
Therefore, as the time horizon increases the present value of future cash flows decreases due to the discounting effect of interest.
One has to be very careful while calculating the PV of uneven cash flows as a small mistake may lead to a huge difference and eventually resulting in a loss.