Answer to Question #198848 in Economics for pema

Question

There are two ways of calculating present and future values when there are multiple cash flows. Both approaches are straightforward extensions of our earlier analysis of single cash flows. 

1. Explain the variations on the calculations of these values. 
2. What considerations are made when determining which method you use to calculate present and future values? 
3. How are cash flows affected when one method is used over another? 

Answer 1

To find the PV of multiple cash flows, each cash flow much be discounted to a specific point in time and then added to the others. To discount annuities to a time prior to their start date, they must be discounted to the start date, and then discounted to the present as a single cash flow.

The FV of multiple cash flows is the sum of the FV of each cash flow.

To sum the FV of each cash flow, each must be calculated to the same point in the future.

If the multiple cash flows are a fixed size, occur at regular intervals, and earn a constant interest rate, it is an annuity.