Principles of Managerial Finance

154 PART 2 Important Financial Concepts

immediate response to one’s entries. The interplay between computer and

user becomes a game that many find both enjoyable and instructive.

• Finally, spreadsheets communicate as well as calculate. Their output
  includes tables and charts that can be incorporated into reports. They inter-
  play with immense databases that corporations use for directing and con-
  trolling global operations.They are the nearest thing we have to a universal
  business language.

The ability to use spreadsheets has become a prime skill for today’s managers.

As the saying goes, “Get aboard the bandwagon, or get run over.” The spreadsheet

solutions we present in this book will help you climb up onto that bandwagon!

Basic Patterns of Cash Flow

The cash flow—both inflows and outflows—of a firm can be described by its gen-

eral pattern. It can be defined as a single amount, an annuity, or a mixed stream.

Single amount:A lump-sum amount either currently held or expected at

some future date. Examples include $1,000 today and $650 to be received at

the end of 10 years.

Annuity:A level periodic stream of cash flow. For our purposes, we’ll work

primarily with annualcash flows. Examples include either paying out or

receiving $800 at the end of each of the next 7 years.

Mixed stream:A stream of cash flow that is notan annuity; a stream of

unequal periodic cash flows that reflect no particular pattern. Examples

include the following two cash flow streams A and B.

Note that neither cash flow stream has equal, periodic cash flows and that A

is a 6-year mixed stream and B is a 4-year mixed stream.

In the next three sections of this chapter, we develop the concepts and tech-

niques for finding future and present values of single amounts, annuities, and

mixed streams, respectively. Detailed demonstrations of these cash flow patterns

are included.

Mixed cash flow stream

End of year A B

1 $ 100 $50

2 800 100

3 1,200 80

4 1,200  60

5 1,400

6 300