Economics Time Value Of Money Questions Medium
In the context of time value of money, present value and future value are two key concepts that help determine the worth of money over time.
Present value refers to the current value of a future sum of money, discounted at a specific rate of interest. It is the amount that a future cash flow is worth in today's terms. Present value calculations are used to determine the value of an investment or a series of cash flows at a specific point in time. By discounting future cash flows, present value takes into account the time factor and the opportunity cost of money.
On the other hand, future value represents the value of an investment or a sum of money at a specific point in the future, considering the effects of compounding. It is the amount that an investment will grow to over time, given a specific interest rate. Future value calculations are used to determine the potential growth of an investment or the accumulation of savings over a certain period.
The main difference between present value and future value lies in the direction of the cash flow. Present value focuses on determining the current worth of a future sum of money, while future value focuses on calculating the value of an investment or sum of money at a future point in time.
In summary, present value is the current value of a future cash flow, while future value is the value that an investment or sum of money will grow to over time. Both concepts are essential in understanding the time value of money and making informed financial decisions.