Corporate Finance

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Corporate Finance

Cash flow

Time 0 1 2

500 1000 1500

What would happen to the future value if the cash flow was to occur at the beginning of the year? Begin-
ning of year-1 is same as year-0 (i.e., today) and the beginning of year-2 is same as end of year-1. The cash
flow would be:

Time 01 2

Cash flow 500 + 1000 1500

FV = (500 + 1000)(1.08)^2 + (1500 × 1.08) = Rs 3369

It should be clear by now that the time interval between two cash flows considered so far have been
exactly one year and cash flows cannot be aggregated across years. But they can be moved to any particular
year and then added.

Present Value of a Series

Consider the same cash flows again. The present value of this series is the sum of present values of each of
these cash flows.

Time

Cash flow

0 1 2

500 1000 1500