What is a Mixed Stream Cash Flow?
Financial planning is a key part of any organization. Businesses need to see how their sales, production and cash flows will work out in the future. A key concept in financial planning is to examine the cash flows linked to any investment decision. These refer to the movement of cash in and out of a business.
Mixed Stream cash flows have a combination of irregular inflows of cash. This is different from annuities which are simply outflows of cash. Mixed stream cash flows are slightly different to assess as they have no specific pattern of cash receipt.
To understand cash flows, it is best to remember that they are the movement of cash into or out of a business after an action or an investment.
The movement of cash is directly due to the action or investment made. This is called a cash flow stream. These movements of cash are called mixed streams if they are going into the business. If the business is making these payments to someone, they are called annuities.
Calculating the current value of the expected cash to come in can be done by applying some formulas usually called cash flow metrics.
The most common formulas are those of that help calculate what is known as Net Present Value (NPV), the profitability of an investment, how much returns it yields, and how many years it will take to recover the cost of an investment.
These concepts are all used in evaluating cash flow streams to make investment decisions.
Defining Present Value of Cash Flows
The current worth (PV) of a future income stream is the sum of money or flow of cash expected in the future at a certain interest rate, which is called the rate of return.
It can be calculated by discounting these future income stream at the interest rate. The lesser the interest rate, the greater the worth of the expected income streams in the future.
Calculating the Value Of A Mixed Stream Cash Flow
The projected worth of a variable flow of income needs to be calculated for each individual stream and needs to be done on a table or preferably an Excel sheet.
To find out the projected worth of a variable or mixed stream cash flow we need to find out the interest factors for the future value expected. The Future Value Interest Factors (FVIF) are available in interest factor tables.
People looking to calculate the future values can look up values against the expected interest rate and multiply the cash flow amount with the FVIF value for the given rate and the period of the cash flow.
In terms of formula, the calculation of a future value of a variable income stream can be done in the following manner:
FV of a mixed stream cash flow = (I1 × FVIF1) + (!2 × FVIF2 )+ (!3 × FVIF3 +……. + In ×
FVIFn
The formula can be written as follows:
FV of a mixed stream cash flow = I1 × (1+i)1 + I2 × (1+i)2 + I3 × (1+i)3+ …….. + I1 ×
(1+i)n
I = Is the income expected for different periods (1,2,3,…n)
i = Interest rate
The projected interest factor is taken from the future value interest factors table (these are available online and in most financial management books).
The values can also be calculated for each year, provided the interest rate is given. The formula to calculate the FVIF is as below:FVIFn = (1+i)n
Mixed Stream Cash Flow Example
A business is evaluating an investment plan that will yield a variable flow of income over five periods as follows:
The business will get a rate of 7% on its invested capital. To find out how much the company will get at the after 5 years we can look up the value of the FVIF and then work out the variable stream:
in the working shown in the table, the FV of the variable stream cash flow is $130,110. This tells us that means that by year 5, the business will have earned total cash of $130,110 from this investment plan.
Each cash flow carries its future value for the expected interest rate.
The total of these projected values of yearly cash inflow adds up to the total FV of mixed stream cash flow that the business will earn from its investment.
The result from using an Excel spreadsheet will be the same as the tabular calculation.
FV Interest Factors (FVIF) Table
The FVIF table is key in assessing any mixed cash flow scenario as it is useful to find the future value of a variable stream of income.
We can work out this table by using the FVIF formula discussed earlier, we can find out the future value interest factors just by using the calculation.
The formula is pasted into an excel sheet and dragging it so that you get the FVIF value.
Hope this explains mixed stream cash flow for you. You might be also interested in What is Base Case Cash Flow? and Cash Flow Adequacy Ratio.
