How to Determine Future Value of Cash Flows

Even small monthly amounts can add up to a nice retirement nest egg, thanks to compounding.

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Cash flows are one-time or periodic inflows of money, such as dividends, or outflows, such as tuition expenses. Determining the future value of these cash flows is important for several reasons, including deciding whether you will have enough money saved for your retirement or for your kids' college education. The future value of a cash flow is what it will be worth if you invest it at a certain interest rate over several months or years.

Step 1

Compute the future value of one-time cash flows, such as a special cash dividend from a company. First, add the interest rate per period in decimal form to 1 and raise the sum to the power of the total number of compounding periods. The interest rate per period is the annual rate divided by the number of compounding periods per year. Second, multiply the result by the cash flow amount. For example, if interest compounds annually at 5 percent over 10 years, the future value of a single $100 cash flow is $100 multiplied by (1 plus 0.05) raised to the power of 10, or $100 multiplied by 1.6289, or about $163.

Step 2

Calculate the future value of different cash flows, such as holiday bonuses or the proceeds from selling surplus assets. You would simply add the future values of each cash flow. Continuing with the earlier example, if you had invested an additional $500 at 7 percent annually for the second five years of the 10-year period, the future value would be $500 multiplied by (1 plus 0.07) raised to the power of 5, or about $702. Therefore, the total future value after 10 years would be $163 plus $702, or $865.

Step 3

Calculate the future value of a constant cash flow, such as semi-annual bond interest payments. First, add 1 to the interest rate per period in decimal form and raise the sum to the power of the total number of compounding periods. Second, subtract 1 from the result. Finally, multiply the result by the constant cash flow amount divided by the interest rate per period. For example, you may want to know the future value of quarterly cash flows of $50 if the annual interest rate is 5 percent. The quarterly interest rate would be 0.05 divided by 4, or 0.0125. First, add 1 to 0.0125 and raise it to the power of (5 multiplied by 4) to get 1.0125 raised to the power of 20, or about 1.282. Second, subtract 1 from 1.282 to get 0.282. Finally, multiply $50 by (0.282 divided by 0.0125) to get the future value of about $1,128.

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About the Author

Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.

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