What is Present Value

The worth of today's money of a future cash flow, computed using a specified rate of return (discount rate is called the present value (PV). It means that receiving $500 today is worth more than receiving the same $500 in the coming two years.

Present value is frequently used by investors and businesses to determine the rate of return on investments or projects. Greater discount rates result in lower present values of investments, whereas lower discount rates result in higher present values. However, to determine the present value of an amount of money or anticipated cash flow, understanding the discount rate is essential.

Calculating the present value of your investments you can successfully estimate how much you'll need to save for retirement or other future purchases for which you have a rough idea of the future worth and the projected rate of return on your investment.

In general, money today is worth more than the same amount in the future, which is the basis of the theory of present value. Using the present value calculator, you can determine the current worth of that future money so you may properly prepare how and where to invest. 

When utilising current value to assist you make decisions regarding investments, there are usually two factors to consider. The first one is the current inflation rate, while the second thing to be considered is the time worth of money.

Formula of Present Value in Finance

A formula used in finance to determine the present value of money received at a future date is the Present Value formula. According to the formula, time impacts the value of any amount of money. The formula for present value calculation is represented below

PV = C1/(1+r)n

The C1 in the formula above denotes the cash flow at period 1, while the r and n denotes the rate of return and number of periods respectively. 

As a result of its wide variety of applications, the Present Value formula may be used in a wide range of financial fields, including business financing and investment financing. Present value analysis is utilised in many different fields of finance, but it is also used as a component in other financial formulae.

What is Future Value

The calculation of how much value of payments as well as the investments will be worth till a specific rate in future while being at a constant return rate is known as future value. The future value is a useful metric to decide what financial decisions to be made as it gives the estimate of how much return would be received in the future. 

It also implies that the rate of return is constant along with a single amount invested only at the beginning. It helps investors to estimate the worth of certain assets in the future, while present value examines how much money you need today to make a particular amount of money in the future. Online future value calculator help to find the future value.

Moreover, the FV provides more sound financial decisions regarding your investments and payments.

Formula of Future Value in Finance

To estimate the worth of your current deposit and investment in the future is calculate using the future value formula as given below

FV = C0 x(1+r)n

There are a number of other FV formulas, but this is the one most often employed.In the formula above, the cash flow at the present value is represented using the C0 and rate of return and number of periods is denoted as r and n respectively. However, when utilising basic yearly interest, the following formula may be used to calculate future value

FV = C0 x (1+(rxn))

Final Words

The present and future value both are measures highly used in finance to estimate the value of money. The present value determines the current value of your money while the value of the current asset based on an expected rate of return is expressed as future value.