Boundless: Finance: "Chapter 5, Section 5, Part 1: Future Value, Multiple Flows"

Future Value, Multiple Flows

To find the FV of multiple cash flows, sum the FV of each cash flow.

LEARNING OBJECTIVE

  • Calculate the Future Value of Multiple Annuities

KEY POINTS

    • The FV of multiple cash flows is the sum of the FV of each cash flow.
    • To sum the FV of each cash flow, each must be calculated to the same point in the future.
    • If the multiple cash flows are a fixed size, occur at regular intervals, and earn a constant interest rate, it is an annuity. There are formulas for calculating the FV of an annuity.

TERMS

  • annuity

    A specified income payable at stated intervals for a fixed or a contingent period, often for the recipient's life, in consideration of a stipulated premium paid either in prior installment payments or in a single payment. For example, a retirement annuity paid to a public officer following his or her retirement.

  • incremental cash flows

    the additional money flowing in or out of a business due to a project

  • cash flow

    The sum of cash revenues and expenditures over a period of time.

FULL TEXT

Future Value, Multiple Cash Flows

Finding the future value (FV) of multiple cash flows means that there are more than one payment/investment, and a business wants to find the total FV at a certain point in time. These payments can have varying sizes, occur at varying times, and earn varying interest rates, but they all have a certain value at a specific time in the future.

The first step in finding the FV of multiple cash flows is to define when the future is. Once that is done, you can determine the FV of each cash flow using the formula in . Then, simply add all of the future values together.


FV of a single payment

The FV of multiple cash flows is the sum of the future values of each cash flow.

Manually calculating the FV of each cash flow and then summing them together can be a tedious process. If the cash flows are irregular, don't happen at regular intervals, or earn different interest rates, there isn't a special way to find the total FV.

However, if the cash flows do happen at regular intervals, are a fixed size, and earn a uniform interest rate, there is an easier way to find the total FV. Investments that have these three traits are called "annuities. "

There are formulas to find the FV of an annuity depending on some characteristics, such as whether the payments occur at the beginning or end of each period. There is a module that goes through exactly how to calculate the FV of annuities.

If the multiple cash flows are a part of an annuity, you're in luck; there is a simple way to find the FV. If the cash flows aren't uniform, don't occur at fixed intervals, or earn different interest rates, the only way to find the FV is do find the FV of each cash flow and then add them together.



Last modified: Friday, 8 April 2016, 5:05 PM