Many times, investors like to know the present value which grows to a given future value. Suppose, you want to save some money from your salary to but a scooter after 5 years. You should know how much money should be put into bank now in order to get the future value after 5 years. The present value is simply the inverse of compounding used in determining future value. The general relationship between future value and present value is given in the following formula: PV = FV x DF = FV X 1 (1+R Illustration 4 : Find the present value of Rs. 50,000 to be received at the end of four years at 12 percent interest compounding quarterly. = PV PV = FV 1 FV x PVIF at 12% Rs. 50.000 x 0.623 Rs. 31,150 = = 2 2.8 PRESENT VALUE OF AN UNEVEN SERIES OF PAYMENTS : The annuity includes the constant amount in which cash flows are identical in every period. Many financial decisions involve constant cash flows, however, some important decisions are concerned with uneven cash flows. For example, investment in shares is expected to pay an increasing series of dividends over time. The capital budgeting projects also do not normally provide constant cash flows. In order to deal with uneven payment streams, we have to multiply each payment by the appropriate PVIF and then sum these products to obtain the present value of an uneven series of payments. Illustration 5: Mr. Shah has invested Rs. 50,000 on Xerox machine on 1st Jan. 2002. He estimates net cash income from Xerox machine in next 5 years as under. Year Estimated inflows 2002 12,000 2003 15,000 2004 18,000 25,000 2005 2006 30,000 At the end of 5th year Machine will be sold at Scarp value of Rs. 5,000. Advice him whether his project to viable, considering interest rate of 10% p.a