The formula to calculate the present value of uneven cash flows is:
\[ PV = \frac{CF_0}{(1+r)^0} + \frac{CF_1}{(1+r)^1} + \ldots + \frac{CF_n}{(1+r)^n} \]
Where:
Uneven cash flow refers to a situation where a business or individual experiences fluctuations in the timing and amount of their incoming and outgoing cash. This means that the cash inflows and outflows are not evenly distributed over a given period. In a business context, uneven cash flow can occur due to various reasons. For example, seasonal businesses may experience high cash inflows during certain months and lower inflows during off-peak seasons.
Let's assume the following values:
Using the formula:
\[ PV = \frac{1000}{(1+0.05)^0} + \frac{1500}{(1+0.05)^1} + \frac{2000}{(1+0.05)^2} + \frac{2500}{(1+0.05)^3} = 1000 + 1428.57 + 1814.06 + 2152.76 = 6402.22 \]
The present value (PV) of the uneven cash flows is 6402.22.
