Finanee DARDEN fi uvsis7 BUSINESS PUBLISHING Ju, 1,2001 UNIvERSITv VIRGINIA DEVELOPING FINANCIAL INSIGHTS: USING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH Base Case Sta ing Point Most everyone is familiar with the concept that money placed in a savings account will grow to a larger amount as the years pass if the money in that account ears interest at a specified annual compounded rate, For example, $500 invested in a savings account that earns 10% interest compounded annually will grow to become $550 (i.e., $500 * 1.10) after one year, $605 (ie., $550 * 1.10) after two years, and $665.50 (j.e., $605 1.10) after three years.’ Think about the numerical example just depicted. It took three sequential calculations to arrive at the $665.50 answer—one calculation for each year involved. If the question had been posed as involving 12 years or even 25 years, a multitude of tedious, repetitive calculations would have been required. Is there a shortcut? Yes. If we take the 1.10 multiplier amount from each of the three parenthetical notations above and simply multiply them together—1.10 » 1.10 * 1.10—we get a numerical factor of 1.331. So, if some reference book could provide us with the 1.331 multiplier as being applicable to a 10% situation over three years, all we would have to do is take the initial $500 amount put into the savings account and multiply it by 1.331 to get the very same answer as above—$665.50. Are there reference materials that provide such multipliers for a variety of interest and years combinations? Yes, there are, and they are referred to as future value (FV) factors. Such reference materials are useful because no matter the initial amount invested, a specified combination of time and interest will always have the same multiplier effect. Thus, future value factor tables are readily available, de ‘a number of possible different interest rates along ‘one axis and a number of different years along the other? In fact, Exhibit 1 presents just such a The 1.10 multiplier comes from the fact that in one year there will be 100% of that year amount plus an additional 10% due to a year's wrth of interest having been accumulated ata 10 + 10% = 110%, which converts to an arithmetic multiplier of 1.10, 2 This ease explores cash flows on an annual basis. Appendix 1 explains what to do when cash flows occur on a monthly or quarterly basis, starting monetary rate. Thus, 100! This case was prepared by Professor Mark Haskins. It was written as a basis for class discussion rather than to rate effective of ineffective handling of an administrative situation. Copyright © 2011 by the University of inia Darden Schoo! Foundation, Charlotesville, VA. All rights reserved. To order copies. send an email 10 salesGadardenbusinesspublishing.com. No part ofthis publication may’ be reproduced, stored in a retrieval system, wed in @ spreadsheet, or transmitted in any form or by any means-elecironic. mechanical, photocopying recording, or otherwise without the permission af the Darden Schoo! Foundation. ‘This materials only tobe usedin conjunction with MBA lecturesuvs137 table. In it we can find the 10% column and the three-years row and find the multiplier amount at the intersection of those two table coordinates, and it is 1.331—the same as we determined it should be. Moreover, if we were using a financial calculator or Excel, the embedded programs in those tools would derive the exact same multiplier once we entered the data pertaining to years and interest rate Can We Reverse the Flow of Time? In business, the basic question posed above often requires us to reverse the focus. For example, the question might be some form of “My customer is willing to pay me $663.50 in three years; what is the equivalent monetary amount, as of today, of that future receipt?” Pause for just a moment—the same basic interplay of time and interest described in the first example must be in play in this scenario also...right? Of course, but instead of a current invested monetary amount growing into a larger future amount due to the compounding of interest, we must now work with a stipulated future monetary amount and in essence, unwind, roll back in time, reverse the compounding of interest phenomenon. In this instance, we are being asked to ascertain the present value (PV)}—the value today—of a future monetary amount, using the relevant interest and year information. ‘To do that, the process is simply the reverse of what we did earlier. So, if the relevant interest environment is 10% and the number of years is three, we execute the following three calculations 1. $665.50 » 1.10 = $605 2. $605 + 1.10 = $550 3. $550 + 1.10 = $500 Thus, receiving $665.50 in three years, when the interest rate environment is 10%, is equivalent to receiving $500 today. In short, this has to be true because as we saw earlier, if we invest $500 today in a savings account that pays 10% interest, that savings account balance will grow to become $665.50 in three years. Another way to state this is this: If, over the next three years, relevant interest rates are 10%, the economic value of $665.50 in three years is exactly equal to $500 today. As before, this can become a laborious series of calculations if the number of years involved is substantial. And, just as before, there is a shortcut. Mathematically, whereas the compounding of interest phenomenon was a multiplicative mathematical task, the unwinding of a compounded interest phenomenon must be a divisive mathematical task. Specifically, we findUVS137 that: 1» 1.10 = 0.90909, and then 0.90909 = 1.10 = 0.82644, and finally, 0.82644 ~ 1.10 0.7513.’ And, if we take 0.7513 x $665.50, we get $500 (with a bit of rounding). Are there reference materials that provide such factor multipliers for a variety of interest and year combinations when we are seeking to derive the present value of a future monetary amount? Yes, and they contain a host of PV factors, Such reference materials are useful because ‘no matter the future amount to be received, a specified combination of time and interest will alway’ have the same multiplier effect. Exhibit 2 provides an example of such a reference table. In it, we can find the 10% column and the three-years row and extract the multiplier factor at the intersection of those two coordinates and it is, just as we thought it should be, 0.7513. (Please note that the example depicted at the bottom of the table in Exhibit 2 is an additional one, different from the one discussed here.) Moreover, if we are using a financial calculator or Excel, the embedded algorithms in those tools use the same factor once we have entered into those tools the relevant number of years (three) and interest rate (10%). Moving Beyond Single Ending or Starting Monetary Amounts The two scenarios described above are emblematic of the simplest of situations—they both started with single monetary amounts to be compounded (the Exhibit I-related example) or discounted (the Exhibit 2-related example). In many personal and business financial situations the reality is that there are multiple cash amounts coming in or going out over the course of a stipulated time period that are pertinent to the sought-after FV or PV. Let’s lay the foundation for those sorts of scenarios. Assume you invest $80 today and at the beginning of each of the next two years for a total of three such deposits, in a 6% savings account. At the end of three years, what will that it have in it? Clearly, we could answer that question by applying the technique and 1 factors we described and used in the very first example. That is, we could find the future value of three lump sums—one of which is invested for three years, one of which is in the ested for only one year. In fact, at the bottom of it 3, this approach is depicted, But there is an easier, quicker way. Since this scenario involves three applications of the Exhibit 1 factors, we can develop reference materials that accumulate the effects of a variety of multiple applications of Exhibit 1’s factors. Indeed, the Exhibit 3 factors portray such accumulations. Please note that the Exhibit 3 factors are various summations of sequential Exhibit 1 factor amounts for a given interest rate. For this scenario’s three deposits in a 6% savings account, the Exhibit 3 factor is 3.375, which is the sum of the Exhibit 1 6% factors associated with one year, two years, and three years (1.06 + 1.1236 + 1.191, subject to minimal rounding). So 3.375 x $80 ~ $270, the amount to which three (starting today) annual invested amounts of $80 each grow to in a 6% account at the end of three years. sted to note thatthe 0.7513 present value multiplier figure can the same as 1 ~ 1.331, which indeed equals 0.7513. » Some readers may hav ‘also be derived by the Following:uvsi37 As before, let’s reverse the direction of the time frame. Assume, for example, you are to receive $70 at the end of each of the next three years. The natural question to arise is, what is the single present value monetary amount, as of today, that is equivalent to that series of three receipts? Assuming a 12% interest rate environment, this question can be answered by applying the technique and Exhibit 2 factors that we used in an earlier example. If we were to pursue that approach, we would have to execute three separate calculations for each of the three $70 receipts—that approach is depicted at the bottom of Exhibit 4.* But as we were able to do in using Exhibit 1 to develop Exhibit 3, we can use Exhibit 2 to develop Exhibit 4, which in tum. can then be used as a shortcut for PV situations with multiple eash flows in the future. Indeed, Exhibit 4 is simply the summation of Exhibit 2 factors for a variety of time periods within an interest rate column. So, in this example, we can easily go to Exhibit 4’s 12% column, three- years row, and find the factor of 2.402, which is the sum (with a bit of rounding) of the pertinent Exhibit 2 factors (0.8929 + 0.7972 + 0.7118). And 2.402 x $70 ~ $168.14. The interpretation of this present value is as follows: In a 12% interest rate environment, receiving $168.14 today is equivalent to receiving three payments of $70 at the end of each of the next three years. Practice Your FV and PV Skills 1. You just tumed 35 and have been saving for an round-the-world vacation. You want to take the trip to celebrate your 40th birthday. You have set aside, as of today, $15,000 for such a trip. You expect the trip will cost $25,000, The financial instruments you have invested the $15,000 in have been earning, on average, about 8%. (You may ignore income taxes.) a, Will you have enough money in that vacation account on your 40th birthday to take the trip? What will be the surplus, or shortfall, in that account when you tum 40? (Hint: Exhibit 1 will be useful in answering this question.) bl fyou had to, you could further fund the trip by making, starting today, five annual $500 contributions to the account. If you adhered to such a plan, how much will be in the account on your 40th birthday? (Hint: Exhibit 3 and the answer to part (a) above will both be useful in answering this question.) 2. Your company has been offered a contract for the development and delivery of a solar- powered military troop transport vehicle. The request for proposal provides all the necessary technical specifications and it also stipulates that two working, economically feasible prototypes must be delivered in four years, at which time you will receive your only customer payment—a_single_and_final_payment_of $50 million, Assume a reinvestment interest rate of 18% for all the monies received over the next four years. (You may ignore income taxes.) * Appendix 2 shows how to adjust the data in Exhibit 4 for cash flows atthe beginning (instead of the end) of the year-S- uvs137 , What lump-sum dollar amount would you be willing to accept today instead of the ‘$50 million in four years? (Hint: Exhibit 2 will be useful in answering this question.) b.Alt_ ematively, what four yearly receipts, starting a year from now. would you be willing to accept? (Hint: Exhibit 4 and the answer to part (a) above will both be useful in answering this question.) ‘The aged but centrally located golf course you manage does not have an in-ground automated water sprinkling system. Instead, 0 properly water the course, sprinklers and hoses must be repeatedly set, moved, and put away by some of the grounds crew—a tedious and laborious task. If over the next 12 years you project annual savings of about $40,000 from having an automated system, what is the maximum price you would be willing to pay today for an installed, automated golf course sprinkler system? (Assume an interest rate of 6%, and you may ignore income taxes.) a. Redo your calculation using a 10-year time period and $48,000 in annual savings b.Redo your initial calculation one more time using $50,000 in annual savings for the first six years and $30,000 in annual savings for the next six years. ‘The cafeteria you operate has a regular clientele for all three meals, seven days a week. ‘You want to expand your product line beyond what you are currently able to offer. To do so requires the purchase of some additional specialty equipment costing $45,000, but you project a resultant increase in sales (after deducting the cost of sales) of about $8,000 per ‘year for each of the next eight years with this new equipment. Assuming a required rate of return (ie., a hurdle rate) of 8%, should you pursue this opportunity? Why or why not? Do the analysis under two conditions: a, You are part of an income-tax-exempt enterprise. b.T_he enterprise you are part of is subject to a 40% corporate income tax rate, and the straight-line, depreciable life of the equipment you are contemplating purchasing is five years, You are contemplating the purchase of a one-half interest ina corporate airplane to facilitate the expansion of your business into two new geographic areas. The acquisition would eliminate about $220,000 in estimated annual expenditures for commercial flights, mileage reimbursements, rental cars, and hotels for each of the next 10 years. The total purchase price for the half-share is $6 million, plus associated annual operating costs of $100,000. Assume the plane can be fully depreciated on a straight-line basis for tax purposes over 10 years. The company’s weighted average cost of capital (commonly referred to as WACC) is 8%, and its corporate tax rate is 40%. Does this endeavor present a positive or negative net present value (NPV)? If positive, how much value is, being created for the company through the purchase of this asset? If negative, what additional annual cash flows would be needed for the NPV to cqual zero? To what phenomena might those additional positive cash flows be ascribable? ‘The final tally is in: This year’s operating costs were down $100,000, a decrease directly attributable to the $520,000 investment in the automated materials handling system put in“6 UVvs137 place at the beginning of the year. If this level of annual savings continues for five more ‘years, resulting in six total years of annual savings, what compounded annual rate of return will that represent? If these annual savings continue for nine more years, what compounded annual rate of return will that represent? (You may ignore income taxes.)Years BEES RREER ES eevaneunn 2% 1.0200 1.0404 1.0612 1.0824 108 1.1262 1.1487 amy 1.1951 1.2190 1.2034 1.2682 1.2936 13195 1.3489 13728 1.4002 1.4282 1.4568 .aase Exhibit 1 DEVELOPING FINANCIAL INSIGHTS: USING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH. Future Value Factors for a Single Lump Sum Invested Today for Years: Exhibit 1 Factors = (1 + Interest)" 1% 6% 11.0400 1.0600 10816 1.1236 1.1209 1.1910 1.1699 1.2625 1.2167 1.3382 1.2653 1.4185 13159 1.5036 13686 1.5938 1.4233 1.6895 1.4802 1.7908 15395 1.8983 16010 2.0122 1.6651 2.1329 17317 2.2609 1.8003 2.3965 1.8730 2.5404 19479 2.6928 20258 2.8543 2.1068 3.0256 2191 3.2071 ‘example (assuming 10%): Stort here Today $100 Hep 110m) $110 «1.10 > $128 OR: $100.00 x 1.331 ‘Annual Interest Rates 10% 12% 14% 16% 18% OK 1.0800 1.1664 1.2597 1.3605 1.4693 1.5869 1.7138 1.8509 1.9990 2.1589 2.3316 25182 2.7196 29372 372 3.4259 3.7000 3.9960 43157 4.6610 1.1000 1.1200 1.1400 1.1600 1.2100_1.2544 1.2096 13456 1.331 9 1.4815 1.5609 46a. 1 1.8106 1.6105 1.76232\.9254 2.1003 Lm 19738 2.4364 19487 22107 2.8262 21036 2.4760 3.2784 23579 27731 3.2819 3.8030 25937 3.1058 ana 2.8531 3.4785 4.2262 5.1173 3.1384 3.8960 4.8174 5.9360 3.4523 4.3635 5.492 3.7975 48871 6.2613) 417 5.4736 7.1379 45950 6.1304 8.1372 5.0545 6.8650 9.2765 5.5599 7.6900 10.5752. 6.1159 86128 12.0557| 6.7275 9.6463 13,703 110m $133.10 $133.10 (so: PV amount x Exhibit J factor = FV amount) 1.1800 1.3924 1.6430 1.9388 2.2878 2.6996 3.1855 3.7589 4.4355, 5.2338 6.1759 7.2876 3.5998 1o.a72 119737 14,1290 16.6722 19.6733 23.2148 27.3930 Uvs137 1.2000 1.4400 1.7280 2.0736 2.4883, 2.9860 3.5832 4.2908 5.1598 61917 7.4301 oii 10,5993 12.8392 15.4070 1e.4gse 22.1861 26.6233 31.9880 38.3376Years BEBSRKEDRE Bev oneune Exhibit 2 Factors 2% 0.9904 0612 0.9423 0.9238 0.9057 8880 0.8705 o.gsas o.8368 0.8203 0.8083 0.7885 0.7730 0.7579 0.7430 anes oma 0.7002 .6a6e 0.6730 Exhibit 2 DEVELOPING FINANCIAL INSIGHTS: USING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH Present Value Factors for a Single Amount » Years in the Future: | + Exhibit 1 Table Factor in the Same Cell % 0.9515 0.9286 0.8890 o.ssas, o.a219 (0.7903 0.7599 0.7307 0.7026 0.6756 0.6496 0.6246 0.6006 05775 015553 05339 05134 0.4936 0.476 o.as64 o% o.9434 (0.8900 0.8396 0.7921 0.7473 0.7050 0.6651 0.6274 ‘sor sss 0.5268 0.4970 o.46se aaa 0.4173 0.3936 0374 0.3503 0.3305 ont ‘example (assuming 8%) $158.77 1.08 + $471.47 go 108 = $18 ‘Annual Interest Rates 10% 0.9259 0.573 0.7938 0.7350 0.6806 0.6302 seas 05403 0.5002 0.4632 0.4289 03971 03677 0.3405 03182 02918 0.2703 o.2s02 0.2317 02105 oR: $200.00 x (So: PV amount = Exhibit 2factor % FV amount) 0.2633 0.2398 0.2176 0.1978 0.1799 0.1635 ua 0.7938 1% 18% 0.8029 0.872 07972 0.7695 coms 0.6750 0.6355 0.s91 05674 asis4 0.4556 0.3996 0.3506 0.3075 0322) 0.2697 0.2873, 0.2366 0.2567\ 0.2076 0.2292 \o.1821, 2016 0.1597 oa7 aor 0.1631 9.1229 0.1456 1078 (0.1300 dose o1161 dos29 1037 go728 = 158.76" *eitference between $158.77 and $188.76 due to rounding 108+ uvsi37 16% 18% 20% ogs2t 0.7432 0.6407 05523 0.4761 4104 0.3538 0.3050 02630 02267 0.1954 0.1685 0.1482 0.1252 0.1079 0.0930 ‘0.0802 0.0691 0.0596 0.0514 oe47s ons 0.6086 0.5158 oas7t 0.3704 03139 0.2660 0.2255 o.asi1 0.619 0.1372 0.1163 0.0985 0.0835 0.0708 0.0600 0.0508 0.0431 0.0365 $200.00 stort here a) 0.8333 0.6948 05787 0.4823 0.4019 0.3348 02791 0.2326 0.1938 0.1615 0.1346 oz 0.0935 0.0779 0.0609 o.0sat 0.0451 0.0376 0.0313 0261us ‘Table Factors = Sum of Exhi ™ Years 1020 2.060 a2 4208 5.308 6.438 7583 3755 9.950 11169 pan 13.680 sag7s 16.293 17.639 19012 2412 zien 23297 24783 BSESRREGE EB oavoneune ‘example (using 6%): Exhibit 3 DEVELOPING FINANCIAL INSIGHTS: ING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH Future Value Factors for a Series of Invested Amounts at the Beginning of » Years: 1 Factors for Corresponding Cell and All Preceding Cells for that Interest Rate An ~ oa 2azz 3.206 a6 5.633 6.898 8218 9.583 11.006 12.485 14.025 15.627 37.292 19.028 20.825 22.698 26.585 26.671 28.778 30.969 $80 3375 391 4.066 4837 5610 5877 5.975 7536-797 7.398 9730 10.416 8.97 pm 240 10.491 15085 16519 81 18337 20321 nen 22085 24.733, 15.870 26271 29.850 7.882 31,089 35.786 20015 36581 42672 2.276 42.802 50.660 24673 49,980 59.925 2723 seis 70673 29.905 67394 83.141 32.760 77.969 97.603, 35.785 0.025 114380 33993 3.768 133.841 1os= $ea.e0 11236 $89.89 x aaa: $95.28 aan OR: ss000 * 3375 = 270.00" (50: PV amounts » Exhibit 3factor = FV amount) *iterence between $26987 and 527000 due te ounding ‘his exhibit depicts factors for annus aur (where the cash lows occur atthe star ofeach yar opposed to an 1280 1.200 2s 2610 42s 4368 6154 6.42 aa 8920 112 11916 1437 15.499 18.086 19.799 22s21 24959 27795. 31150 gaan 3ase1 ai219 47.497 49818 58196 50.965 71.035 71939 36.082 136.068 108.932, 102.740 327.117 22.434 353740 145,628 185.688 73.021 224.026Exhibit 4 Factors = Sum of Exhi and All Preceding Cells for that Interest Rate Annual Interest Rates 10% 2% Years 0.980 1942 2.884 3.808 473 5.601 6.472 7.325 8.162 8.983 9.787 10575 11.348 12.106 12.849 13578 14.292 14.992 15.678 16.351 HB eevousune BEBSRUEDS -10- Exhibit 4 DEVELOPING FINANCIAL INSIGHTS: USING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH Present Value Factors for a Series of Amounts » Years in the Future: 2 Factors for Corresponding Cell ‘example (using 12%): % 6% 0962 0.943 0.926 1.886 1.833 1.783, 2775 2673 2577 3630 3.465 3.312 4452 4212 3.993 522 4917 4.623 6002 5582 5.206 6733 6210 5.747 7.435 6802 6247 Bll 7.360 6710 8760 7.887 7.139 9.385 8.384 7.536 9.985 8.853 7.504 10.563 9.295 8.240 Mus 9712 3559 11652 10.106 3.851 12166 10.477 9.122 12.659 10.828 9.372 13134 11.158 9.604 13590 11.470 9.818 Today 1 $70 $62.50 #8929 « $55.80¢".7972 « $49.83. 7118 « $168.13 ‘OR: $70.00 * (So: PV amount 0.909 1.736 2.087 3.170 3.791 4,355 4,868 5.335 5.759 6.145, 6.495 Gaia 7.103 7.367 7.606 7.824 302 8201 8.365 ass 2.402 *diference betwoen $168.13 and $168.14 due to rounding ‘See Appendix 2 for a discussion of how to use this Exhibit when cash flows begin immediately 1% a7 1.647 168.14" Exhibit 4 factor x FV amounts) 16% 0.862 1.605 2.246 2.798 3.274 3.685 4.039 4a 4607 4333 $70 18% agar 1.566 2374 2.690 3.27 3.498 3812 4078 4,303 4.494 4656 4793 4s10 5.008 5.092 5.162 5.222 5.273 5.316 5.353 Stor here 20% 0.833 1528 2.106 2589 2991 3.326 3.605 3.837 4031 4192 4327 4.439 4533 agit 4.675 4730 4715 aan 4.843 4870 UVS137oie uvsi37 Appendix 1 DEVELOPING FINANCIAL INSIGHTS: USING A FUTURE VALUE (F) AND A PRESENT VALUE (PV) APPROACH. ‘What to Do When Cash Flows Occur on a Monthly or Quarterly Basis All the examples in this case involve annual time periods. It is not unusual for payments or receipts of cash to occur on a monthily or even a quarterly basis. There is an easy adjustment process to accommodate such alternative time frames. All that is required is to note that, unless stated otherwise, interest rates are always assumed to involve annual compounding. Thus, if the scenario under consideration involves quarterly cash flows, the vertical axes of the tables in Exhibit 1 through Exhibit 4 can be assumed to pertain to the number of quarters (instead of years) and the stated annual interest rate must be divided by 4 (because there are four quarters per year) before picking the appropriate interest rate column to use in the tables. So, if the desire is to ascertain the PV of a series of quarterly payments, beginning at the end of the first quarter, for the next three years, and the pertinent annual interest rate is 16%, these are the two required adjustments for using the tables: 1. The number of periods to use on the tables’ vertical axes is 12 (3 years = 4 quarters per year) 2. ‘The interest rate to use on the tables’ horizontal axes is 4% (16% annual rate + 4 compounding quarters per year). In short, for a quarterly series of cash flows, we adjust the table axes coordinates by scaling up the number of periods by a multiple of 4 and scaling down the interest rate by a divisor of 4. Similarly, for a monthly series of cash flows, we adjust the table axes coordinates by scaling up the number of periods by a multiple of 12 and scaling down the interest rate by a divisor of 12." " Note: Technically, an interest rate of 16% compounded annually is not equivalent to @ 4% rate compounded quarterly. The reason is that the interest eamed on a quarterly basis is itself subject to the next quarter's compounding, quarter after quarter. For example, $100 earning interest at a 16% annually compounded rate will ‘grow to $116 at the end of one year. On the other hand, $100 earning interest at the rate of 4% compounded {quarterly will grow to S117 at the end of one year. The Fact that the two scenarios are not identical is assumed to be immaterial, and thus the adjustments described above are common when using FV and PV tables $100 «104 = ios slot Los = $108.16 S10R16 =< 104 = $112.49 $1249 =< 104 = SiI7o12- uvs137 ‘Appendix 2 DEVELOPING FINANCIAL INSIGHTS: USING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH Adjusting Exhibit 4 for Cash Flows at the Beginning (Instead of the End) of the Year example (using 12%) Today 1 2 3 $70 $70 $70 Start here font? ——| '$62.50 9929 « $55.80 @".7972 x sua OR: $70.00 x (169+1) $188.30, $70.00 x 2.69 = ($188.30 At times, the series of cash flows for which a present value amount needs to be calculated begins at the start of each year as opposed to the end of each year. The discussion and example depicted in Exhibit 4 identifies the cash flows according to this latter pattern, It is not unusual, however, for the series of cash flows to begin immediately as depicted in the following revised Exhibit 4 example. Please note there are still three annual cash flows, they simply now begin at the start of their respective years. Exhibit 4 can still be used to ascertain today’s PV of this series of cash flows. The way to do that involves two steps. First, use the appropriate interest rate column (12% in this example) and use the two-years row, instead of the three-years row as originally done. In 4, that factor is 1.69, and it will be used to PV all the cash flow amounts except the very first one. Second, because the first cash flow item occurs today, its PV is equivalent to the cash flow amount itself. So, to value it, we simply add 1.0 to the 1.69 factor pertaining to the other cash flow amounts in the example, arriving at an adjusted table factor of 2.69. Using that adjusted factor in the following fashion, $70.00 * 2.69 = $188.30, we get the PV of a series of three annual amounts of $70 each, where the series begins today (immediately), as equaling $188.30. In the above depiction, this is verified by discounting each of the three amounts separately (using Exhibit 2 factors) and obtaining the same total PV amount.