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Difference between Future value and Present Value (1 Viewer)
- Thread starter JosephW
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*Baby-K*
Member
Ok, the way I look at it is:
Future value- amount of money is invested every certain period of time, therefore the future value is the amount at the END of term. The amount to which money grows over a designated period of time at a specified rate of interest.
Present value- amount of money invested in the BEGINNING. It is the current worth of a series of equal payments to be made in the future
Future value- amount of money is invested every certain period of time, therefore the future value is the amount at the END of term. The amount to which money grows over a designated period of time at a specified rate of interest.
Present value- amount of money invested in the BEGINNING. It is the current worth of a series of equal payments to be made in the future
Robin Hood
Member
Future value is the price of something after an amount of time
Present value is the price it is presently at.
Break the words down...
Example
John has a DVD player worth $400, if it appreciates by 4% p.a what will its price be in 5 years time?
so..
FV=PV (1+R)^n
FV= 400(1+.04)^5
FV= $486.66
Therefore, the future value of the DVD player will be $486.66 in 5 years time.
(btw that was a question i made up just then lol)
Present value is the price it is presently at.
Break the words down...
Example
John has a DVD player worth $400, if it appreciates by 4% p.a what will its price be in 5 years time?
so..
FV=PV (1+R)^n
FV= 400(1+.04)^5
FV= $486.66
Therefore, the future value of the DVD player will be $486.66 in 5 years time.
(btw that was a question i made up just then lol)
And two examples of present value?
1. Karen wishes to have $5000 saved in 3 years time for a holiday. Interest is compounded monthly at 6% p.a. What lump sum does he need to invest now to reach his target amount?
You can do this using the little PV formula. The "lump sum invested now" is the present value.
2. James borrows $180 000 at 9% p.a. over 20 years. What is his monthly repayment?
Loans are ALWAYS present value questions, and the amount borrowed is the present value. For this one you'll use the big PV formula. N = $180 000, r = 0.075, n = 240 and you're trying to find M, the monthly payment.
1. Karen wishes to have $5000 saved in 3 years time for a holiday. Interest is compounded monthly at 6% p.a. What lump sum does he need to invest now to reach his target amount?
You can do this using the little PV formula. The "lump sum invested now" is the present value.
2. James borrows $180 000 at 9% p.a. over 20 years. What is his monthly repayment?
Loans are ALWAYS present value questions, and the amount borrowed is the present value. For this one you'll use the big PV formula. N = $180 000, r = 0.075, n = 240 and you're trying to find M, the monthly payment.
1to1 Tutor
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Basically money that you have in your hand today is worth more than money you may get in the future (say a year's time).
But how much is the difference in value?
One way of calculating this is to see what the money today would be worth in a year's time. Let's say you get 3% on your money and let's say you have £1000. In one years time your £1000 will be worth £1030 (simple interest). So effectively the £1000 you may get next year is only worth £970 at todays values).
Another way to look at it is this: What would you prefer, that I gave you £500 now or £10 each year for the next 50 years? Its obviously the first is better, isn't it? The last £10 that I give you in 50 years time will be worth diddly squat.
But how much is the difference in value?
One way of calculating this is to see what the money today would be worth in a year's time. Let's say you get 3% on your money and let's say you have £1000. In one years time your £1000 will be worth £1030 (simple interest). So effectively the £1000 you may get next year is only worth £970 at todays values).
Another way to look at it is this: What would you prefer, that I gave you £500 now or £10 each year for the next 50 years? Its obviously the first is better, isn't it? The last £10 that I give you in 50 years time will be worth diddly squat.
RealiseNothing
what is that?It is Cowpea
You just answered a 4 years old question.
Leffife
A lover is a best friend
1to1 Tutor
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One can then determine the future value of money by using financial tables and formula along with the present value. Defining the present value (PV) as the cash in hand today that will be invested, and the future value (FV) as the amount of money you will possess when the investment has matured, you can then take the interest (I) per compounding period and the number (n) of periods between the present and future and compute FV = PV*(1+I)^n. That is, multiply the present value by one plus the interest n times in order to get the future value.
seremify007
Junior Member
Can't tell if 1to1 Tutor is just a really advanced bot or if they a genuine tutor based on the responses. Interesting that he uses £ rather than $.