Impact of Future value and Present value in investment decisions

Future value and present value are alike because they both work with the time value of money. Future value is "the amount an investment is worth after one or more periods." (Jordan, 2013). Another words it is the amount you will be eligible to receive in cash at a later date when you invest your funds. Present value is "the current value of future cash flows discounted at the appropriate discount rate." (Jordan, 2013). What this is good for is to determine what you need to invest in order to achieve a certain outcome at a later date.

The calculations that are involved with future value are as follows:

To determine the future value of a $500 investment at a 7% interest rate for one year would be calculated as $500 x 1.07 = $535.00 using simple interest. Then if we were to keep this money in the investment for an additional year we would calculate $535 x 1.07 = $572.45.

To determine the present value needed to invest at 6% interest to acquire $500 in one year to be able to purchase an airplane ticket for vacation would be done as follows: Present value x 1.06 = $500, we would then do $500/1.06=$471.70.

These transactions are very beneficial for many facets in life. It is good to determine which investment would be most lucrative for you if you had $1,000 to invest and wanted to determine which avenue to take. Whether it be a savings account at 3% for a year or a savings bond at 4% for 6 months. This would use future value to help determine which process to take. We can use present value to help determine how much we would need to invest or put in an interest bearing savings account to say purchase a new laptop for school. These processes are also good to help evaluate a potential investment for a business you may run or process the books for. These processes are good to understand to help advice clients or employers.

References

Jordan, R. W. (2013). Fundamentals of Corporate Finance. New York: McGraw-Hill/Irwin.