Future cash flows-compounding-Even flows

- Future value is an amount of payment will grow over a given

future time.
- Series of payments when compound interest is applied.

FV = PV x (1+i)n
- *(1+i)n = (1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)… ·(1+i) for “n”
times

What is the future value (FV) of an initial $100 after 3 years, if I/YR =
10%?
Step by Step (method 1)
After 1 year:
FV1 = PV ( 1 + i ) = $100 (1.10)
= $110.00
After 2 years:
FV2 = PV ( 1 + i )2 = $100 (1.10)2
=$121.00
After 3 years:
FV3 = PV ( 1 + i )3 = $100 (1.10)3
=$133.10
After n years (general case):
FVn = PV ( 1 + i )n
 Step by Step (method 2)
F.V=CF0 (1+i) n + CF1 (1+i) n-1+ CF2 (1+i) n-2+ CF3 (1+i) n-3
= $100 (1.10)3+$100 (1.10)3-1+$100 (1.10)3-2+$100 (1.10)3-3
= 133.1+121+110+100

Time Lines

Formula approach
FV = PV x (1+i n
)
=100(1+0.1)3

=$133

Peri 0 1 2 3
ods 10
% 110
P.v=$100 121 F.v=$133

Present Value – Discounting- Even flows

 - Present Value is the current value of a future amount of money, or
a series of payments, evaluated at a given interest rate.
Same idea, but begin at the end. Rearrange the Future value equation to
look like this:
PV = FV÷[(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)·(1+i)]
PV = FV ÷ (1+i)n
- Finding the PV of a cash flow or series of cash flows when
compound interest is applied is called discounting (the reverse of
compounding).
The PV shows the value of cash flows in terms of today’s purchasing
power.
PV = FVn x 1/ ( 1 + i )n

What is the present value (PV) of $100 due in 3 years, if I/YR =

10%?
Formula approach
PV = FVn / ( 1 + i )n
PV = FV3 / ( 1 + i )3
= $100 / ( 1.10 )3
= $75.13

Step by Step (method 1)

years F.V(cashflows) D.F(10%) P.V
(1+0.10)-n (d.f*F.V)
0 100 1 100
1 100 0.9090 91
2 100 0.82644 83
3 100 0.7513 75.13

Step by Step (method 2)

P.V=CF1/ (1+i) 1 + CF2/ (1+i) 2+ CF3 (1+i) 3
=100/(1.1)0+100/(1.1)1+100/(1.1)2+100/(1.1)3

= 100+91+83+75.13