MULTIPLE CASH FLOWS

 Uneven Cash flow stream

 Even cash flow stream (Annuity)

Chaivisuttangkun S.
- Ordinary annuity
- Annuity due
- Perpetuity

47
CASH FLOW STREAM
 Suppose you invest $500 in a mutual fund today
and $600 in one year. If the fund pays 9%
annually, how much will you have in two years?

Chaivisuttangkun S.
0 1 2 Years

$500 $600 FV=?

48
  How much will you have in 5 years if you make no
further deposits?

0 1 2 3 4 5 Years

$500 $600 FV=?

Chaivisuttangkun S.
Total FV =

0 1 2 3 4 5 Years

$1248.05 FV=?

49
  Suppose you plan to deposit $100 into an account in
one year and $300 into the account in three years.
How much will be in the account in five years if the
interest rate is 8%?

Chaivisuttangkun S.
0 1 2 3 4 5 Years

$100 $300 FV=?

$300 x (1.08)2

$100 x (1.08)4

Total FV = 300(1.08)2 + 100(1.08)4

= $________

50
 FV WITH MULTIPLE CFS
0 1 2 t-1 t Years

$A $B $C $X $Y
$X x (1+ r)1
.

Chaivisuttangkun S.
.
.
.

$C x (1+ r)t-2

$B x (1+ r)t-1

$A x (1+ r)t

[$Y] + [$X x (1+ r)1] + … + [$C x (1+ r)t-2] + [$B x (1+ r)t-1] + [$A x (1+ r)t] = Total FV51
  Suppose you need $1000 in one year, $2000
more in two years and $3000 more in three
years. If you can earn 10% on your money,
how much do you have to put up today to
exactly cover these amounts in the future?

Chaivisuttangkun S.
0 1 2 3 Years

PV=? $1000 $2000 $3000

52
 PV with Multiple CFs
0 1 2 t-1 t Years

$A $B $X $Y

$A / (1+ r)1

Chaivisuttangkun S.
$B / (1+ r)2
.
.
.
.

$X / (1+ r)t-1

$Y / (1+ r)t
Total PV = [$A / (1+ r)1] + [$B / (1+ r)2] + … + [$X / (1+ r)t-1] + [$Y / (1+ r)t] 53
 ANNUITIES
An Annuity is a series of equal payments made at fixed
intervals for a specified number of period
 If the first payment (or CF) occurs at the end of the period, it
is called an ordinary annuity

Chaivisuttangkun S.
 If the first payment (or CF) occurs at the beginning of the
period, it is called an annuity due
 If the payments (or CFs) continues forever, it is called a
perpetuity

54
Examples:
 Anasset promises to pay $500 at the end of the
next three years  3-year (ordinary) annuity

0 1 2 3 Years

Chaivisuttangkun S.
$500 $500 $500

o An asset promises to pay $500 at the beginning

of the next three years  3-year annuity due
0 1 2 3 Years

$500 $500 $500

55
 Deposit$500 at the end of each year for 5
years at 10 percent annual interest rate.
How much will you have in 5 years? In 10
years?

Chaivisuttangkun S.
 Deposit
$100 at the end of each year for 50
years at 4 percent annual interest rate.
How much will you have in 50 years?

56
MATH TECHNIQUE
y = 2 + 2 + 2 + 2 ++ 2 + 2
2 3 4 99 100

Chaivisuttangkun S.
57
x= +
1
2
1
2 2 + 1
2 3 + 1
2 4 ++ 2
1
99 + 2100
1

Chaivisuttangkun S.
58
Future Value for Annuity Cash Flows
0 1 2 t-1 t Years

$C $C $C $C
$C x (1+ r)1
.

Chaivisuttangkun S.
.
.
.

$C x (1+ r)t-2

$C x (1+ r)t-1

C + [C x (1+ r)1] + … + [C x (1+ r)t-2] + [C x (1+ r)t-1] = FVA

59
Future Value for Annuity Cash Flows
(1) FVA = C + [C × (1 + r )] + ... + [C × (1 + r )t − 2 ] + [C × (1 + r )t −1 ]
(2) The picture can't be displayed.

Chaivisuttangkun S.
The picture can't be displayed.

[[1× (1 + r )t ] − 1]
FVA = C ×
r
FVA = C × FVIFA(r , t ) 60
 FVA – EXAMPLE
 Deposit $100 at the end of each year for 50 years at 4 percent
annual interest rate. How much will you have in 50 years?
[[1× (1 + r ) t ] − 1]
FVA = C ×

Chaivisuttangkun S.
r
[[1× (1 + 0.04) 50 ] − 1]
FVA = 100 ×
0.04
FVA = 15,266.71
Tabular solution:
FVA = C x FVIFA(r,t)
FVA = 100 x FVIFA(4%, 50)
FVA = 100 x 152.67 =$15,267 61
 PRESENT VALUE FOR ANNUITY CASH FLOWS
0 1 2 t-1 t Years

$C $C $C $C

$C / (1+ r)1

Chaivisuttangkun S.
$C / (1+ r)2
.
.
.
.
$C / (1+ r)t-1
$C / (1+ r)t
C C C C
PVA = + + ... + +
(1 + r ) (1 + r ) 2 (1 + r ) t −1 (1 + r ) t 62
PRESENT VALUE FOR ANNUITY CASH FLOWS
C C C C
(1) PVA = + + ... + t −1
+
(1 + r ) (1 + r ) 2
(1 + r ) (1 + r ) t
(2)

Chaivisuttangkun S.
1
[1 − ]
(1 + r )t
PVA = C ×
r

PVA = C × PVIFA(r , t ) 63
 Youneed $100 at the end of each of the next
three years. How much do you have to
deposit into your account today? Given that
you earn 5% interest rate.

Chaivisuttangkun S.
0 1 2 3
PV=? $100 $100 $100

$100 / (1.05)1 Years

$100 / (1.05)2

$100 / (1.05)3

= ______________________
= $______________
64
Numerical Solution:

C = 100, r = 0.05, t = 3
1
[1 − ]
(1 + r )t
PVA = C ×

Chaivisuttangkun S.
r

1
[1 − ]
(1 + 0.05) 3
PVA = 100 ×
0.05
PVA = 100 × _____________
PVA = $ ____________

65
Tabular Solution:

C=$100, r = 5%, t = 3
PVA = C x PVIFA(1%, 50) (Table A.3)

Chaivisuttangkun S.
= $100 x ________
= $________

66
 Suppose you plan to deposit $2,000 every year
to a retirement account paying 8%. If you retire
in 30 years, how much will you have?

Chaivisuttangkun S.
 Instead, if you want to have $300,000 at
retirement, how much will you need to deposit
each year?

67
 ANNUITY DUE
 An asset promises to pay $C at the beginning
of the next five years  5-year annuity due

Chaivisuttangkun S.
0 1 2 3 4 5 Years

$C $C $C $C $C

Ordinary Annuity

0 1 2 3 4 5 Years

$ $ $ $ $

68
 ANNUITY DUE - SUMMARY
 PVAD = PVA x (1+r)
 FVAD = FVA x (1+r)

Chaivisuttangkun S.
Step 1: calculate the PV or FV as if it were an
ordinary annuity, and
Step 2: multiply your answer by (1+r)

69
 PERPETUITY
0 1 2 3 4 t =∞ Years

$C $C $C $C $C

Chaivisuttangkun S.
1
[1 − ]
(1 + r )t
PVA = C ×
r

t → ∞ ⇒ (1 + r ) t → ?
PVP =
70
 An investment offers a perpetual cash flow of $500
every year. The return you require on such an
investment is 8%. What is the present value of
these cash flows?

Chaivisuttangkun S.
71