Understanding Cash Flows

The Cash Flow and Time Value of Money templates both use cash flows. The difference is in the entry and interpretation. The Time Value of Money template deals with cash flows as annuities. Each of these cash flows are the same amount. The loan, lease and regular deposit examples below are annuity problems solved in the TVM template. The Cash Flow template deals with investments where the payment is in varying amounts.

To further understand the cash flow model, here is an example of a timeline. Note that inflows of cash are treated as positive amounts (designated by a [+] sign) and outflows of cash as negative amounts (designated by a [–] sign).

This example shows a typical loan problem, where the initial cash flow, the loan amount, is an inflow. Each of the subsequent cash flows - payments to the bank - are cash outflows.

A few items to note:

• Length: The length between cash flows is the same. This denotes that inflows and outflows occur at regular intervals of time.
• Inflows/Outflows: This cash flow begins with an inflow followed by subsequent outflows of cash. The cash flow can, however, begin with an outflow and be followed by subsequent inflows of cash. Furthermore, there can be mixed inflows and outflows of cash.
• Payments: The payment amounts are the same length, meaning that each payment is the same amount. This could differ for Cash Flow template problems as explained above because of the possibility for varying sized cash flows. Assume that, at the end of the series of cash flows, there was some larger payment (called a balloon payment) to pay off this loan because the last cash flow is longer than the others.

All cash flow problems can be represented in this fashion, with cash inflows and outflows viewed over some time period. The following are examples of other types of cash flow or TVM problems.

Examples

Leases

Investment with Regular Deposits

Cash Flow with One Sign Change