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Q. Explain Present Value of a Series of Cash Flows?
Present Value of a Series of Cash Flows: - In a business circumstances it is very natural that returns received by a firm are spread over a number of years. To approximation the present value of future series of returns the present value of each expected inflow will be calculated.
Where PV = total of individual present values of every cash flow
C1, C2, Cn = Cash flows after periods 1,2------n
i= Discounting Rate
Instance: - Given the time importance of money as 10% (that is the discounting factor). You are necessary to find out the present value of future cash inflows that will be received over next four years.
Year
Cash Flows
1
2
3
4
1000
2000
3000
4000
= 909 + 1652 + 2253 + 2732
= Rs. 7546
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After determining the expected cash flows and appropriate interest rate, the last step in the valuation process is to find the total PV of all cash flows. The PV
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