Uneven Cash Flow Calculator
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- September 9, 2019 Updated
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Calculating the present or future value of an investment is easy, as long as that investment generates even cash flows over the period of investment. But uneven or irregular cash flows present a challenge.
Cash flows are uneven:
- Where the amount of cash inflows over different years is not equal, and/or
- Where the time interval between cash flows is not equal.
Why do you need an Uneven Cash Flow Calculator?
Whether you are an experienced investor or are investing for the first time, calculating the present and future value of your cash flow is critical.
Unfortunately, calculating the future value of an uneven cash flow can also be complicated. Which is why we have created our Uneven Cash Flow Calculator, to help simplify the process of valuing your uneven cash flows.
Usually, the nature of an asset determines a cash flow’s consistency. Calculating the present or future value of an annuity is different – and more straightforward – than calculating the present or future value of uneven cash flows.
Our uneven cash flow calculator will assist you to easily calculate the value of uneven cash flows using different present and future value factors.
Some examples where you can use our uneven cash flow calculator:
- Floating interest rate bonds and instruments paying dividends have uneven cash flows because of different coupon payments over different years.
- The majority of fixed income instruments have even cash flows. But that is not true for equity and other assets like startup investments. Also, investments by a company in a new project or a factory will usually have uneven cash flows.
- Dividend payments by companies are never completely even. Even if a company has a half-yearly dividend policy, it is not compulsory to pay the dividend every half year. Sometimes, the profits may not be sufficient to support a dividend payment, as happened during the 2008-09 recession.
- Also, shareholders might get a special dividend if a company has sold off a division for cash.
These types of income streams are referred to as uneven cash flows.
The Concept of Present Value and Future Value
The concept of “the time value of money” works on present-value and future-value components. The discounted cash flow method helps you calculate the value of both, based on a discount rate or cost of capital.
The Present Value of an asset is defined as the total of the current value of cash flows to be received over a future period, discounted at a specified discount rate. An increase in the discount rate results in a decrease in valuation, and vice-a-versa.
The basic premise is that $1 earned today has more value than $1 earned in the future. To illustrate this with an example, let’s assume that you will receive $1 million after one year. The value of the same amount of money today will be only $0.97 million.
One reason behind the decline in present value is the inflation rate. You can’t buy the same quantity of goods with the same amount of money today versus the previous year. Here, the present value formula discounts the future cash flows to incorporate the effect of inflation.
Future value is the worth of an investment at a particular date in the future. The calculation of future value depends on the estimation of earnings of an asset over the time period.
Drawback: Future values do not account for the effect of currency exchange rate fluctuations. Volatile exchange rates can have a major hit on your cash inflows. This is relevant if the investment is in a different currency and/or the cash inflows will be in multiple currencies.
How to Use Our Uneven Cash Flow Calculator
Please replace data in blue with your own information. Here are the step by step instructions on how to use this free financial calculator.
1) Start Period Date
Input the date at which the present or future value is to be calculated. The future period will be determined based on the cell data. The uneven cash flow calculator has been customized to include a period of 10 years, but you can change that to a shorter period.
Present Value Factor
The calculation of present and future values is dependent upon the start date. If you are going to calculate the present value of an amount to be received after year 1, the period will be 1. On the other hand, if the amount is to be received after a period of 10 years, the period will be 10.
Future Value Factor
Assume that you will receive a certain amount of money at the end of each year over a period of 10 years. After year 1, you will receive an amount of $1 that will be reinvested at a rate of 3% per annum over the remaining period under investment which is (10-1 =) 9 years. The future value factor will obviously decrease as we go further into the future.
2) Discount Rate
The discount rate (for future value) is the rate of return that can be earned in the future, if the amount is invested today. It is also referred to as the foregone opportunity cost, weighted average cost of capital, and hurdle rate (for present value).
The opportunity cost is considered a suitable discount rate for individual investors. The appropriate discount rate for companies is the weighted average cost of capital, as they are usually financed via debt and equity.
One limitation of the discount rate is that a single rate is used to calculate the present value of cash flows throughout the period under investment, whereas interest rate and risk premium are always changing.
3) Cash Flow
Net cash flow is the total amount received by investors over the period of investment. This can be in the form of interest, dividends, profit or commission, etc. Fill the calculator with the expected amount of cash to be generated during each year. This will be used to calculate the present value or future value.
Future cash flows can be estimated using a combination of historical earnings and an evaluation of market conditions based on various internal and external factors. Depreciation or non-cash items must be adjusted before arriving at the final figure.
Where debt has been used by you to fund the cost of investment, interest paid on such debt (financing costs) is to be deducted from income from such investment to arrive at the net cash flows.
Lump sum payments in the form of up-gradation of machinery or equipment must also be adjusted while calculating net cash flows.
IRR and Uneven Cash Flows
The internal rate of return is the rate at which the net present value of an investment is zero. If you are considering an expansion plan and have two options available for the type of machinery to be purchased, you will choose the option generating higher NPV.
Another factor to take into account is the time period required to materialize the returns, i.e. the period to construct the building or machinery, install the equipment, etc.
Although the calculations may be cumbersome, the process is simplified by using the uneven cash flow calculator.
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