What are unequal cash flows? (with photo)

In finance, capital budgeting is basically the process of making decisions regarding long-term investments.

Basically, uneven cash flows refer to a series of uneven payments made over a given period of time. For example, you may receive the following annual payments over a five-year period: $500 USD, $300 USD, $400 USD, $250 USD, and $750 USD. On the other hand, if regular payments were fixed at a certain amount, cash flows would be equal. For example, one may receive an annual payment of $500, also known as an annuity. Additionally, uneven cash flows can be associated with all kinds of financial situations, including capital budgeting.

In finance, capital budgeting is basically the process of making decisions regarding long-term investments. During this process, managers can use various financial management tools to forecast and estimate the value of one-off cash flows associated with a given investment. This will give them a basis for making a decision to accept or reject the project.

Both fixed and uneven cash flows are vital elements in valuing all types of investments. Financial managers use financial formulas to find the present value of a series of future cash flows. This process helps them calculate the fair value of the investment in question. For example, a finance manager might calculate that the present value of a series of unequal cash flows is $1,000. If this flow of irregular cash flows was produced by a particular asset, he may decide that the most he is willing to pay for the asset is its present value, which is $1,000 USD.

Another example of a series of uneven cash flows is the payments received for investing in so-called unconventional bonds. Unlike regular bonds, also known as basic bonds, unconventional bonds do not pay a regular fixed coupon or interest rate. These bonds include index-linked bonds, so called because they are linked to an index, such as the consumer price index (CPI), which measures the rate of inflation. With these bonds, cash flows reflect changes in the index to which they are linked.

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To illustrate, consider a hypothetical indexed link with cash flows linked to changes in CPI. Assume that, after its issuance, the bond pays $100 of interest. The following year, however, if the CPI increased by a certain percentage rate, interest payments would increase accordingly. For example, it can go up to $105 USD. In short, it is quite difficult to estimate the cash flows associated with this security with certainty, as changes in the CPI will generate uneven cash flows.

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