Stream of Payments

For. Liezel A. Cortejos-Obo

A stream of payments refers to a series of cash
flows or financial transactions that occur over a
period of time. These payments can be either
incoming or outgoing.

Streams of payments can be regular and equal

(like an annuity) or irregular and varying (uneven
cash flows).
Uneven payments involve cash flows that vary in
amount and timing. These payments can be
irregular and do not follow a consistent pattern.

Equal Annual Payments (Annuity) involves

receiving or paying out a fixed amount of money at
regular intervals over a specified period.
Understanding and analyzing streams of payments
is essential in financial planning, investment
evaluation, and decision-making.

Calculating the present value or future value of

these cash flows helps in assessing their current
worth or estimating their accumulated value over
time.
1. To solve for the future value of an uneven stream of
payments

Where:

Vn= future value n

Vo= present value Σ Vo(1+i)n-t
Vn= t=0
i=interest rate
n=number of years
t = year
 n
Example 1: Future Value of uneven
stream of payments
Solution: Σ Vo(1+i)n-t
Vn= t=0

Vo= 2000, 5000, 3500 n= 5 years

A pulpwood firm forecasted i= 10% t = 2, 3, 4
its future stand
development and Vn = 2000 (1+0.10)5-2 + 5000 (1+0.10)5-3 + 3500 (1+0.10)5-4

maintenance cost to be Php Vn = 2000 (1+0.10)3 + 5000 (1+0.10)2 + 3500 (1+0.10)1

2,000 for the second year, Vn = 2000 (1.10)3 + 5000 (1.10)2 + 3500 (1.10)1
Php 5,000 for the 3rd year, Vn = 2000 (1.331) + 5000 (1.21) + 3500 (1.10)
and Php 3,500 for the 4th Vn = 2662 + 6050 + 3850
year. At the rate of 10%,
Vn = Php 12,562
how much will the cost be
after 5 years?
 n
Example 2: Future Value of uneven
stream of payments
Solution: Σ Vo(1+i)n-t
Vn= t=0
The cash flows are as follows:
• Php 1,000 at the end of Vo= 1000, 800, 1100, 700, 1050
the first year n= 5 years i= 12% t = 1,2,3,4,5
• Php 800 at the end of the
Vn = 1000 (1+0.12)5-1 + 800 (1+0.12)5-2 + 1100 (1+0.12)5-3 + 700 (1+0.12)5-4 + 1050 (1+0.12)5-5
second year
Vn = 1000 (1+0.12)4 + 800 (1+0.12)3 + 1100 (1+0.12)2 + 700 (1+0.12)1 + 1050 (1+0.12)0
• Php 1,100 at the end of
Vn = 1000 (1.12)4 + 800 (1.12)3 + 1100 (1.12)2 + 700 (1.12)1 + 1050 (1.12)0
the third year
• Php 700 at the end of the Vn = 1000 (1.5735) + 800 (1.4049) + 1100 (1.2544) + 700 (1.12) + 1050 (1)

fourth year Vn = 1573.5 + 1123.92 + 1379.84 + 784 + 1050

• Php 1,050 at the end of
the fifth year Vn = Php 5,911.26
Assuming an annual interest rate
of 12%. How much will this stream
of payment be after 5 years?
2. To solve for the present value of an uneven stream of
payments.

Where:
∞
Vn= future value Vo= t=0
Σ Vn
Vo= present value (1+i)t
i=interest rate
t = year
 ∞
Example 3: Present Value of
uneven stream of
Solution: Vo= t=0
Σ Vn
payments
(1+i)t
Vn= 5000, 4000, 3000, 2000 i= 5%
Find the present value of t = 0,1,2,3
several payments at 5%. 5000 4000 3000 2000
Vo = 0 + 1 + 2 + 3
1+0.05 1+0.05 1+0.05 1+0.05
Year Payments
5000 4000 3000 2000
Vo = 0 + 1 + 2 +
0 Php 5,000 1.05 1.05 1.05 1.05 3

5000 4000 3000 2000

1 Php 4,000 Vo = + + +
1 1.05 1.1025 1.1576
2 Php 3,000 Vo = 5000 + 3809.5238 + 2721.0884 + 1727.7125
3 Php 2,000 Vo = Php 13,258.32
 ∞
Example 4: Present Value of
uneven stream of
Solution: Vo= t=0
Σ Vn
payments
(1+i)t
Vn= 1000, 1200, 800, 1500, 1000 i= 10%
Consider a project that is expected to t = 1,2,3,4,5
generate the following cash flows over
the next five years. 1000 1200 800 1500 1000
Vo = + + + +
1+0.10 1 1+0.10 2 1+0.10 3 1+0.10 4 1+0.10 5
Year Payments
1 Php 1,000 1000 1200 800 1500 1000
Vo = 1 + 2 + 3 + 4 + 5
1.10 1.10 1.10 1+0.10 1+0.10
2 Php 1,200
1000 1200 800 1500 1000
3 Php 800 Vo = + + + +
1.10 1.21 1.331 1.4641 1.6105
4 Php 1,500
Vo = 909.0909 + 991.7355 + 601.0518 + 1024.5202 + 620.9252
5 Php 1,000
If the discount rate is 10%, calculate the Vo = Php 4,147.32
present value of these cash flows.
3. To solve for the present value of equal annual
payments.

Where:

a = annual payment Vo= a (1+i)n-1

Vo= present value i(1+i)n
i=interest rate
n = number of payments
Example 5: Present Value of equal Solution: Vo= a (1+i)n-1
annual payments
i(1+i)n
a = 900 i = 12% n= 5
Assuming a contractor has (1+0.12)5 − 1
Vo = 900 x
to pay Php 900.00 a year 0.12 1+0.12 5

for 5 years with an (1.12)5 − 1

Vo = 900 x
0.12 1.12 5
interest rate of 12%. What
is the present value of all Vo = 900 x
1.7623 − 1
0.12 (1.7623)
these payments? 0.7623
Vo = 900 x
0.2115
Vo = 900 x 3.6043

Vo = Php 3,243.87
Example 6: Present Value of equal Solution: Vo= a (1+i)n-1
annual payments
i(1+i)n
a = 1500 i = 6% n= 10
You are considering an
investment opportunity that Vo = 1500 x
(1+0.06)10 − 1
0.06 1+0.06 10
promises to pay you Php
(1.06)10 − 1
1,500 at the end of each Vo = 1500 x
0.06 1.06 10
year for the next 10 years. If 1.7908 − 1
Vo = 1500 x
the discount rate for this 0.06 (1.7908)

investment is 6% per Vo = 1500 x

0.7908
0.1074
annum, what is the present Vo = 1500 x 7.3631
value of these equal annual
payments? Vo = Php 11,044.65
Let’s Practice!
 Future Value of uneven n
No 1: stream of payments Solution: Σ Vo(1+i)n-t
Vn= t=0

Vo= 1500, 2000, 3500 n= 5 years

A software development i= 5% t = 2, 3, 4
company anticipates its
future software upgrade Vn = 1500 (1+0.05)5-2 + 2000 (1+0.05)5-3 + 3500 (1+0.05)5-4

costs to be Php 1,500 for the Vn = 1500 (1+0.05)3 + 2000 (1+0.05)2 + 3500 (1+0.05)1
2nd year, Php 2,000 for the Vn = 1500 (1.05)3 + 2000 (1.05)2 + 3500 (1.05)1
3rd year, and Php 3,500 for Vn = 1500 (1.1576) + 2000 (1.1025) + 3500 (1.05)
the 4th year. The costs are Vn =1736.4 + 2205 + 3675
expected to increase by 5%
Vn = Php 7,616.40
annually. How much will the
total cost be after 5 years?
No. 2: Present Value of equal Solution: Vo= a (1+i)n-1
annual payments
i(1+i)n
a = 2000 i = 8% n= 8
You are evaluating an
investment opportunity that Vo = 2000 x
(1+0.08)8 − 1
0.08 1+0.08 8
offers to pay you Php 2,000
(1.08)8 − 1
at the end of each year for Vo = 2000 x
0.08 1.08 8
the next 8 years. The 1.8509 − 1
Vo = 2000 x
discount rate for this 0.08 (1.8509)

investment is 8% per Vo = 2000 x

0.8509
0.1481
annum. What is the present Vo = 2000 x 5.7454
value of these equal annual
payments? Vo = Php 11,490.80
 ∞
No. 3: Present Value of
uneven stream of
Solution: Vo= t=0
Σ Vn
payments
(1+i)t
Vo= 1300, 1800, 700 i= 12%
Consider a project that is expected to t = 1,2,3
generate the following cash flows over
the next three years. 1300 1800 700
Vo = 1 + 2 + 3
Year Payments 1+0.12 1+0.12 1+0.12

1 Php 1,300 1300 1800 700

Vo = 1 + 2 +
1.12 1.12 1.12 3
2 Php 1,800
1300 1800 700
3 Php 700 Vo = + +
1.12 1.2544 1.4049

If the discount rate is 12%, calculate the Vo = 1160.7143 + 1434.9490 + 498.2561

present value of these cash flows.
Vo = Php 3,093.92
END