The concept of present value states that today’s sum of money is more valuable than the sum of money over time. Thus, money obtained in the future is not valued the same as funds received now (Fernando, 2022). A contrast between present value and future value best shows the time worth of money theory and the requirement for dangerous interest rates to be charged or paid.
The worth of a present asset at a future date, depending on an estimated rate of growth, is known as future value. The future value calculation implies a steady growth rate as well as a fixed initial fee that is not touched over the investment’s lifetime. The future value calculation allows investors to forecast the earnings that may be made by financial assets with differing levels of precision (Chen, 2021). Given a certain interest rate, present value is the actual price of a future amount of money or portfolio of assets. The present value is calculated by taking the future value and multiplying it by a discount rate or the interest rate that might be received if the money were invested.
Hence, it would be reasonable to state that the concept of present value is significant because it enables investors to determine whether the amount they pay for investments is reasonable. In turn, the future value assessment allows an investor to make a reasonable assumption about an investment’s earnings. Such suggestions can be demonstrated through a particular case as well. For instance, the decision of a shipowner to purchase a new vessel can be affected by both explored notions. In particular, through the lens of present value, they can figure out a reasonable sum of money they can afford in this regard. Future value can assist in projecting possible incomed that this investor is likely to obtain due to the purchase.
References
Chen, J. (2021). Future value (FV). Investopedia. Web.
Fernando, J. (2022). Present value (PV). Investopedia. Web.