Difference Between Present Value vs Future Value
Present and future values are the terms that are used in the financial world to calculate the future and current net worth of money which we have today with us. Generally, both the Present Value vs Future Value concept is derived from the time value of money and its monetary concept use by business owners or investors every day. It is a simple idea that whatever money received today is worth more than money to be received one year from now or any other future date. It is important to calculate the time value of money so that the investor can distinguish between the worth of investment that offers them different returns at a different time.
Present Value
Present value is nothing but how much the future sum of money worth today. It is one of the important concepts in finance and it is a basis for stock pricing, bond pricing, financial modeling, banking, and insurance, etc. Present value provides us with an estimated amount to be spent today to have an investment worth a certain amount of money at a specific point in the future. Present value is also called a discounted value. It is an indicator for investors that whatever money they will receive today can earn a return in the future. With the help of present value, method investors calculate the present value of a firm’s expected cash flow to decide if a stock is worth investing in today or not.
The formula for calculating PV is shown below
Here ‘CF’ is future cash flow, ‘r’ is a discounted rate of return and ‘n’ is the number of periods or years.
Example
Let’s say that you have been promised by someone that he will give you 10,000.00 Rs 5 year from today and interest rate is 8% so no we want to know what the present value of 10,000.00 Rs which you will receive in future so,
- PV = 10,000/ (1+0.08)5
- PV = 6805.83 (To the nearest Decimal)
So present-day value of Rs 10,000.00 is Rs 6805.83
Future Value
Future Value is the amount of money that will grow over a period of time with simple or compounded interest. It is one of the most important concepts of finance and it is based on the time value of money. Investors use this method to know what will be the future value of their investment after a certain period of time calculates based on the assumed growth rate. So future value basically tells us how much money you will get in any sort of investment in the coming future.
Future value is calculated using the formula
Here ‘PV’ Present Value, ‘FV’ is future Value; ‘r’ is the rate of return and ‘n’ is a number of periods or year.
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Example- Let’s see the example
Suppose Ram is investing a sum of Rs 3000 in some fixed deposit for one year and for the same Ram will receive interest with a rate of 7℅. So at the end of the year Ram will receive 3210 Rs that is 3000 Principal plus 210 Rs interest. So we can say that Rs 3210 is the future value of today’s money that is of Rs 3000. Similarly, we can calculate the FV of 3210 Rs after 2 years and so on using the compound interest formula.
Diagrammatic representation of present value vs future value:
Head to Head Comparison between Present Value vs Future Value (Infographics)
Below is the top 6 difference between Present Value vs Future Value
Key Differences between Present Value vs Future Value
Let us discuss some of the major differences between Present Value vs Future Value.
- Present value is the current value of future cash flow whereas future value is the value of future cash flow after specific future periods or years.
- In present value inflation is taken into consideration so it is the discounted value of a future sum of money whereas in future value inflation is not taken into account it is an actual value of a future sum of money.
- Present value involves both discounted rate and interest rate whereas future value involves only interest rate.
- Present value helps investors whether to accept/invest or reject the proposal whereas future value gives investors to estimate how much he will gain based on the interest rate.
- The process of finding present value is called as discounted whereas the process of finding future is called as capitalization.
- In present value, future value is given whereas in case of future value present value is already specified.
Present Value vs Future Value Comparison Table
Let’s look at the top 6 Comparison between Present Value vs Future Value
|
The Basis Of Comparison Between Present Value vs Future Value |
Present Value |
Future Value |
| Meaning | It is the current value of future cash flow or future value. | It is the amount of money which will grow over a period of time with simple or compounded interest. |
| Rate | Involved both discounted as well as the interest rates. | Involved only interest rate. |
| Decision | Investors can make the decision whether to accept/invest or reject the proposal with help of the PV method. | FV shows the only future gain of total investment so the importance for investment decision making is less. |
| Process/ Method | Discounted | Capitalization |
| Formula | PV = CF/(1+r)n | FV = PV or CF (1 + r)n |
| Concept | What amount should we invest today to get a specific amount in the future? | If we invest some money today what will be the amount we get at the future date. |
Conclusion
So from above, it is clear that time value is the economic concept, and calculation of present value vs future value provides basic data to the investor on which to make a rational investment decision. Present value is the sum of money of future cash flows today whereas future value is the value of future cash flows at a specific date. Present value is calculated by taking inflation into consideration whereas a future value is a nominal value and it adjusts only interest rate to calculate the future profit of the investment. There is one similarity that exists between the present value vs future value that is if the interest rate and period remain constant then future value and present value increase or vice versa. The calculation of present value is very important for business it allows the investor to compare the cash flow at different times. In short present value vs future value is a lump-sum payment and a series of equal payment over equal periods of time is called as an annuity.
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