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Future Value and Present Values: Source

Future value and present value are monetary concepts that business owners use when evaluating investments and projects. Future value is the amount an original investment will be worth in the future at a given interest rate, such as $1,000 growing to $1,217 over 5 years at 4% interest. Present value calculates the current worth of future cash flows in today's dollars, so $1,100 received in 5 years would be worth $904 today at a 4% discount rate, making $1,000 today the better choice. Understanding future and present value allows business owners to make rational decisions by considering the time value of money and financial consequences over time.

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22 views

Future Value and Present Values: Source

Future value and present value are monetary concepts that business owners use when evaluating investments and projects. Future value is the amount an original investment will be worth in the future at a given interest rate, such as $1,000 growing to $1,217 over 5 years at 4% interest. Present value calculates the current worth of future cash flows in today's dollars, so $1,100 received in 5 years would be worth $904 today at a 4% discount rate, making $1,000 today the better choice. Understanding future and present value allows business owners to make rational decisions by considering the time value of money and financial consequences over time.

Uploaded by

Ella
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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FUTURE VALUE AND PRESENT VALUES

The time value of money sounds like one of those boring economic concepts that a
small business owner doesn't have time for – but that would be wrong. Future value
and present value are monetary concepts that a business owner uses every day,
whether he realizes it or not. The idea is simple: Money in your pocket today is worth
more than the same amount received several years in the future. The difference is the
effect of inflation and the risk that you may not actually receive the money you expect
in the future.

Future value
Future value is the amount of money that an original investment will grow to be, over
time, at a specific compounded rate of interest. In simpler terms, an investment of
$1,000 today in an account paying 4 percent interest will be worth $1,217 in five years.
That's an example of the time value of money.

Present value
Present value is a measure in today's dollars of the receipts from future cash flow. In
other words, it is a comparison of the purchasing power of a dollar today versus the
buying power of a dollar in the future. For clarity, consider this example. Suppose
someone offered to pay you $1,000 today or $1,100 in five years. Which would you
take?

With a discount rate of 4 percent, an $1,100 payment in five years would have a
present-day value of $904. Therefore, taking the $1,000 payment today is the better
choice.

The time value of money is an economic concept that small business owners must use
when evaluating investments and projects. The financial consequences are significant.
Calculations of future and present values provide basic data on which to make rational
business decisions.

Source:
https://smallbusiness.chron.com/future-value-vs-present-value-77714.html

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