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What Is the Future Value of Cash Flows?

Osmand Vitez
Osmand Vitez

The future value of cash flows represents the total value a certain dollar amount will be in the future. For example, investors may desire information on how much money they can make when placing a certain amount of money into a specific investment. The main pieces of information needed to compute the future value of cash flows include the present value of cash flows, interest rate for the investment, and the number of years the investment will last. Other items that may be necessary are varying cash flows over a given time period and if the investment will have compounding interest. A standard formula or financial calculator can aid in computing the future value.

A standard formula for the computation of future value of cash flows is present value times one plus the interest rate divided by the compounding interest periods. The denominator in this formula is raised to the power of compounding periods times the years of the investment. For example, the mathematical formula looks like this: PV(1 + i/m)mn, where i is the interest rate, m is the number of compounding periods and n is the number of years for the investment. This formula usually applies to all computations relating to the future value of cash flows. Some alterations may be necessary in order to adjust this formula to a different investment or use of cash flow measurements.

The future value of cash flows is a good formula for deciding which investment to place money in. For example, if a company or investor has several different options, using the standard formula above can provide data on how much passive income each investment will incur. Companies often use this formula for investments with varying cash flows over several different periods. Adjusting the formula to handle these differing payments can give the company an idea of which investment will pay out more passive income over a given time period. In most cases, a company will select the investment that provides the most financial return.

As with many mathematical business formulas, the formula for the future value of cash flows is not entirely accurate. The formula only computes an answer based on given information. Inaccurate data plugged into the formula leads to flawed results. Additionally, external factors can alter the outcome of a financial investment greatly. Unfortunately, there is no formula that can detect the problems that may occur in a market or investment.