Financial managers and experienced investors always remain in search of new opportunities to earn maximum return from their investment therefore they always try to invest their money in valuable projects and interest bearing securities. In order to find out value of your current investment it is necessary to calculate the value of cash by considering important economic consequences on the use of cash in the business and the process of calculating values of cash flows is known as time value of money. Time value of money numeral the sum of interest earned over a given amount of time. Time value of money is an important concept of finance theory. Future value and present value are two important components of time value of money. These both are perfect tools utilized to find out the value of streamline within given amount of time and the basic pattern of cash flow.
You can analyze financial value of your decision by calculating future value or present value techniques. Both techniques almost provide same results about a specific decision. Future value procedure helps you to gauge the value of cash flow stream at the end of project’s life and on the other hand, present value procedure helps you to compute cash flows at the start of project’s life (time zero). Time line is important tool to portray the cash flows connected to the given investment. A time line usually covers period of five year and the cash flows occur at time zero. Cash flow stream of your investment helps you to find out total value of your project. Present value technique helps you to find the current value of your investment. Here is preview of this Present Value of Mixed Stream of Cash flows,
Basic Patterns of Cash Flow Streams
Both cash inflows and outflows help you to describe the general pattern of your cash flow stream. Some basic patterns of cash flow streams are as under:
- Single Amount: It is a lump sum amount currently held at some future date.
- Annuity: It is a level intervallic stream of cash flow.
- Mixed Stream: It is stream of imbalanced intervallic cash flows that imitate no particular pattern.
Present Value of Mixed Cash Stream
Purpose of calculating present value of mixed cash stream and future value of a mixed stream is almost similar and after calculation both methods provide almost same results. It helps you to settle on the present value of each future amount and then add all present values together to find total present value.
Usually investors choose discounted cash flow analysis to calculate the present value of mixed or uneven cash flow stream because it is quite reliable method. Cash flow is defined as the difference between the cash coming in and out from your business. Present value serves as sum of future cash flows that can vary according to discount rate and period of time.
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