In finance, capital budgeting is basically the decision-making process 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 the regular payments were set at a certain amount, the cash flows would be the same. 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 decision-making process regarding long-term investments. During this process, managers can use various financial management tools to forecast and estimate the value of the unique cash flows associated with a given investment. This will give them a basis for making the 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 the present value of a series of unequal cash flows to be $1,000. If this stream of irregular cash flows was produced by a particular asset, he might decide that the most he is willing to pay for the asset is its present value, which is $1,000.
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 bonds, so called because they are linked to an index, such as the consumer price index (CPI), that measures the rate of inflation. With these bonds, the cash flows reflect changes in the index to which they are linked.
To illustrate, consider a hypothetical index link with cash flows linked to changes in the CPI. Suppose that, after issuance, the bond pays $100 in interest. However, the following year, if the CPI increased by a certain percentage rate, the interest payments would increase accordingly. For example, you can go up to $105 USD. In short, it is quite difficult to estimate the cash flows associated with this security with certainty, since changes in the CPI will generate uneven cash flows.