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Present Value Formula:
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The Present Value (PV) of uneven cash flows calculates the current worth of a series of future cash flows that are not equal in amount, discounted at a specific rate. This is a fundamental concept in finance for investment appraisal and capital budgeting.
The calculator uses the present value formula:
Where:
Explanation: The formula discounts each future cash flow back to its present value using the discount rate, then sums all these present values.
Details: PV calculation is crucial for investment decisions, capital budgeting, bond pricing, and evaluating the profitability of projects with uneven cash flows over time.
Tips: Enter discount rate as a decimal (e.g., 0.05 for 5%), cash flows separated by commas, and corresponding time periods in years separated by commas. Ensure cash flows and periods arrays have the same length.
Q1: What is the difference between even and uneven cash flows?
A: Even cash flows are equal amounts received at regular intervals (annuities), while uneven cash flows vary in amount and/or timing.
Q2: How do I choose the appropriate discount rate?
A: The discount rate should reflect the risk of the cash flows. It could be the cost of capital, required rate of return, or market interest rate.
Q3: Can this calculator handle negative cash flows?
A: Yes, negative cash flows (outflows) can be entered with a minus sign and will be properly discounted.
Q4: What if my cash flows occur at different frequencies?
A: Ensure all time periods are expressed in consistent units (years). For monthly cash flows, convert the discount rate to a monthly rate and express time in years.
Q5: How accurate is this calculation?
A: The calculation is mathematically precise based on the inputs. Accuracy depends on correctly estimating future cash flows and choosing an appropriate discount rate.