Our most fundamental, personal financial decisions are affected by the time value of money. You may earn interest on the money that you leave in your savings account if you keep it in the bank for a long period as Future values.
In the same way that you’re paying a student loan business when you borrow money to support your education, you are paying the student loan company for the “time period” that you borrow its money.
We have to assess either the present value or the future value of each financial choice we confront. Both these financial approaches yield the same results. The future value will be based on what we have after the project is done while the present value is based on what we have when we started (time zero).
We either compare the present value to the future value and determine what the present value will be worth in the future, or we compare the future value to the present value and see what the future value is worth in the present.
Let us learn what are the present value and future value in finance as described in the article below.
The present value (PV) calculation is use for determining the present worth of a specific quantity of money or a series of future cash flows. The value of this financial asset will differ from the nominal value of the cash flows, as time itself influences value.
Time is measurable as the money’s distance from its source and the greater the distance, the greater the risk. As a result, the value counteracts the original one. The more time distance took the more interest or returns you will receive.
Thus, the present value is the value today of a sum of money. This will receive at some point in the future. Investors should be concerned with present value because it allows them to make comparisons across time. So investors often use a PV calculator for calculating the net present value or a series of future cash flows.
For investors, the addition of PV to financial statements provides an estimate of future financial advantages of assets or liabilities already held or incurred. Future returns use to determine present value, which has applications like financial modelling, stock valuation, and bond pricing.
Present Value Formula
An investor who is trying to decide between two different investments must determine which one gives the better return by calculating their present values using the present value formula. The formula however for the present value is as follow:
PV = (FV)(1+i)ᵑ
The present value may express as PV whereas the FV represents the future value, the I denotes the interest rate on the money and ᵑ gives the number of yearly compounding periods
The present value formula also takes the future value of an asset and discounts it to today’s value. The implied yearly rate of return (whether that’s inflation or interest generated from an investment) must calculatable when performing a present value calculation.
In the equation, the factor is referring to as the “discount rate,” which may describe as the rate at which time impacts value. The present value of a sum of money in the future compared to today, using the discount rate formula, would produce the forgone rate of return.
We also have to look at the number of payment periods in the present value formula, as well as the future value i.e. the projected amount of money in the future.
Like many financial tools, the future value is based on the time value of money concept. It which states that a dollar today is worth more than a dollar at some time in the future.
Future value is the value to which the existing asset grows. In short, the future value is the value of an interest-adjusted asset in the coming future which is calculated by the FV formula calculator.
This is a useful means of estimating how much investment now will be worth in the future. For investors and financial planners, and this helps investors to make smart choices regarding their investments.
Future Values Formula
The future values formula is however expressing in several different variants. The general one is representing by the following formula
Future Value = present value x (1+ interest rate)n
The formula looks like this in the mathematical form
FV = PV(1+i)n
The superscript n denotes in this formula the periods of compound interest. This occurs within the time period for which the value is calculating.
For example, if shares have a value of $10,000 with a 20 per cent annual interest rate may bought. If after six years you would like to determine the future value of this investment. In such a case the equation would look like the following
FV = 10,000 (1 +0.2)6