Cash Flow

Study guides: Exam FM-2, Exam FAM, Exam ALTAM, Exam CP-312, Exam CP-321, Exam INV-101

A cash flow is a payment of money at a specific point in time, which can be positive (inflows/receipts) or negative (outflows/disbursements). A cash flow stream \{(C_t, t)\} is valued by its present value at a given Interest Rate:

\text{PV} = \sum_t C_t \cdot v^t

• Financial mathematics analyzes streams of cash flows by computing their Present Value, Accumulated Value, or Net Present Value
• Cash flow analysis forms the basis for Loans, Bonds, annuities, and Cash Flow Matching for liability management

Valuing an Irregular Cash Flow Stream A project pays 500 at time 1, -200 at time 2 (an outflow), and 1{,}000 at time 3. Find the PV at i = 8\%.

Answer \text{PV} = \frac{500}{1.08} + \frac{-200}{1.08^2} + \frac{1000}{1.08^3} = 462.96 - 171.47 + 793.83 = 1085.32