52 Corporate Finance
IN CONCLUSION
- Money has time value. It is to be explicitly recognized in financial analysis.
- A rupee available today is more valuable than a rupee available sometime in the future because:
(a) Individuals prefer current assumption for future consumption
(b) Of inflation
(c) Of uncertainty in realization of future cash flows- A series of cash flows may be uneven or even. In case of the latter, when the amount is the same, the series
is called an annuity. - The present value of an uneven series of cash flows is the sum of the present values of individual amounts.
PV(CF)t = PV(CF 1 ) + PV(CF 2 ) + ··· + PV(CFn)- The present value of an annuity
PV(CF) = A × [PVIFAr, n]- The future value of an uneven series of cash flows is the sum of future values of the individual amounts:
FV(CF) = FV(CF 1 ) + FV(CF 2 ) + ··· + FV(CFn)- Future value of an annuity = A[FVIFAr, n]
- Present value of an amount is the discounted value at the given discount rate.
- Future value of an amount is the compounded value at the given compound rate.
APPENDIX
Derivation of Future Value of an Annuity (Cash flows occur at the end of each period):
Let A= constant periodic cash flow,
r= interest rate,
n= duration of the annuity,
FVAn= Future value of an annuity, and
PVAn= Present value of an annuity.