Debt Consolidation Loan

Before reading this tutorial, be sure you have a good grasp on moving cash flows around on a timeline. You will really need this foundation to be able to undersand uneven cash flows. In the world of finance, we will often deal with different cash flows occurring at very different times. To illustrate this point, take a look at the following timeline:

You should notice right away that we aren't dealing with an annuity. These are cash flows of different amounts and they do not occur at the end of every year. If our appropriate discount rate to use is 12%, what is this cash flow stream worth to us today?

To find the answer to this problem, we're going to need to discount each of these cash flows, one by one, back to time zero. This is extremely simple. First, set your future value equal to $200. N is 3, Interest is 12, and solve for present value. On your calculator, you will press (for the first cash flow in year 3):

We found out that the $200 cash flow in year 3 is worth $142.36 to us today. We're not done yet! Now find what the other two cash flows are worth at time zero. Remember, you just set them as the future values and change your N. Everything else should stay the same. Here is the finished timeline:

When you've found the present values of each cash flow, you can add them up to find out the total value today of $659.14. Try the next problem on your own to make sure you understand this concept.

Practice Problem
ABC Company has the opportunity to receive $50,000 at the end of year 6, $65,000 at the end of year 7, and $25,000 at the end of year 10. If their opportunity cost of funds is 8%, how much is this worth to them today?

Solution:
Not too bad, right? Just discout these three cash flows back in the same way we did above, add the time 0 values up, and you will get an answer of $81,015.20.

I think you've got it! If you have a question on this tutorial, please check out our forum.

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