Simple Cash Flows

A simple cash flow is a single cash flow in a specified future time period; it can be depicted on a time line in figure 3:

Figure 3: Present Value of a Cash Flow

Cash inflow: CFt

Discounting converts future casfflow into cash flow today where CFt = the cash flow at time t.

This cash flow can be discounted back to the present using a discount rate that reflects the uncertainty of the cash flow. Concurrently, cash flows in the present can be compounded to arrive at an expected future cash flow.

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