concept of Future Value (FV)

Future value means a technique to find out that how much the prasent value for the cash flow or assets will be worth at a specific time in the future i.e after 3 year or 5 year or at any point of time in the future

calculating future value as follow

Future value with simple interest is calculated in the following manner:

Future Value = Present Value x (1 + (Interest Rate x Number of Years)]

example, Joel invests $2,000 for five years with an interest rate of 10%. The future value would be $1,500.

Future Value = $2,000 x [1 + (0.1 x 5)]
Future Value = $2,000 x 1.5
Future Value = $3,000

Future value with compounded interest is calculated in the following manner:

Future Value = Present value x [(1 + Interest Rate) Number of Years]

For example, John invests $2,000 for five years with an interest rate of 10%, compounded annually. The future value of John’s investment would be $1,610.51.

Future Value = $2,000 x [(1 + 0.1)5]
Future Value = $2,000 x 1.61051
Future Value = $3,221.02

Why is FV an important topic in money management

Future value calculation is important because of following factor

Dollar today is worth more than the same quantity of money in the future. You can invest a monet today and receive return on your Investment.

Loans, investments, and any other deal must be compared at a single point in time to determine if it’s a good deal or not.

The process of determining how much a future cash flow is worth today is called discounting. It is done for most major business transactions during investing decisions in capital budgeting.

Why would you want to take $1000 today instead of waiting for a year?

we want to take $1000 today instead of waiting for a year because of the time factor.If we have $ 1000 at prasent and we invest it for 1 year at the rate of 8% then at the future time we will get 1080 .so we want take $1000 today instead of waiting for a year

What is an opportunity cost within the concept of investing?

opportunity cost means the alternative that we have forgone at the time of taking investment decision i.e. the advantage you have taken by choosing the other option

example

In placing your dollar in the stock of B at the rate of 5%, you gave up the opportunity of another investment – say, in Company Ayielding 6%. In this situation, your opportunity costs are 1% (6% – 5%).

Explain the concept of Present Value (PV) in your own words

Present Value means the current value of a future sum of money for the given a specified rate of return. Future cash flows are discounted at the discount rate, and the lower discount rate there will be higher present value of the future cash flows and if there is higher discount rate there will be lower present value of the future cash flows.

Why is PV an important topic in money management?

at the time of choosing the investment in a project — such as an expansion, acquisition or just the purchase of a new piece of equipment — it may be years before that project begins producing a positive cash flow. The business corporate needs to know whether those future cash flows are worth the upfront investment. That’s why the time value of money is so important an important topic in money management.

What happens to the present value factor as the discount rate or the interest rate increases or decreases for a given time period?

cash flows are discounted at the discount rate, and the lower discount rate there will be higher present value of the future cash flows and if there is higher discount rate there will be lower present value of the future cash flows.