Fair Market Value Of A Cash Flow Stream That Includes An Annuity

Cash Flow

refers to payments received (cash inflows) or payments or deposits made (cash outflows). Cash inflows can be represented by positive numbers and cash outflows can be represented by negative numbers. It is also the amount of cash and cash-equivalents being transferred into and out of the business.

Cash Inflow

refers to money received.

Cash Outflow

refers to payments or deposits made.

Fair Market Value (FMV) of Cash Flow

refers to a single amount that is equivalent to the value of the payment stream at a particular date.

Economic Value of Cash Flow

refers to the fair market value or value of the payment stream on a specific date.

Focal Date

the particular date where the fair market value of a cash flow stream is determined.

Fair Market Value (FMV)

is the price that an asset would sell for on the open market.

Cash Flow Stream

a series of payments or cash flows evaluated at a certain focal date.

Payment Stream

a series of payments whose value is determined at a specific date.

Lump-Sum Payment

a single payment made at one time.

Present Value Approach

determining the fair market value by choosing the start of the term as the focal date and computing the present value of each offer.

Future Value Approach

determining the fair market value by choosing the end of the term as the focal date and computing the future value of each offer.

Ordinary Annuity

an annuity where payments are made at the end of each period.

General Annuity

an annuity where the payment period is different from the conversion period.

Equivalent Rate

the converted interest rate based on the payment interval.

m₁

number of payment intervals per year.

m₂

number of conversion periods per year.

r

nominal interest rate.

i

interest rate per payment interval.

t

term or number of years.

n

total number of payments.

R

regular payment.

DP

down payment.

PV

present value.

FV

future value.

FMV Formula Concept

Fair Market Value = Down Payment + Present Value.

Economic Value (EV)

obtained by adding the down payment to the computed present value of the annuity.

Focal Date at Start of Term

compute the present value of each cash flow offer.

Focal Date at End of Term

compute the future value of each cash flow offer.

Fair Market Value Comparison

the offer with the higher market value is considered preferable.