TIME VALUE CALCULATIONS WITH COMPLEX CASH FLOWS

Once the basic types of time value of money calculations are mastered the calculations can be combined together in numerous different ways to solve complex financial problems.  Even the most complex financial situations can be modeled and expressed as a series of timelines and the positive and negative cash flows associated with different points on the timelines.  

For example, a business manager deciding on whether to expand production facilities is really faced with assessing the total impact of a number of different cash flows associated with the business decision.  the various cash flows could include the following;

cash outflows at the start of the project for 

• purchase of machinery and equipment,

• freight and insurance charges,

• equipment installation charges,

• worker training,

cash outflows during the project for

• utilities,

• labor expenses,

• raw materials and other supplies purchases,

cash inflows during the project from increased sales revenues, and 

other cash inflows or outflows at the and of the project associated with ending those operations.

In order to assess the viability of a complex project with all these various cash flows, all cash flows must be stated on a present value basis in order to determine if the project generates a positive or negative net cash flow (or net present value, NPV).  If the project has a positive NPV, accepting the project adds value to the firm.

Regardless of how complex the project or business activity, all of the time value calculations can be identified as one of the four basic types of calculations identified here.  By separating complex cash flows into their separate components, even the most complex set of time value calculations can be restated as a set of very simple time value problems.

Be sure to see the text book assignments for more information on this topic.