The value of future financial assets or stream of cash flows, assuming a given rate of return, is its present value(PV). The value of the present amount of money or stream of cash flows in a specific future time and place, given a specified rate of return, is known as Future value(FV).
What is Present Value(PV)?
The present value is the sum of all future cash flows discounted at a specific rate of return (PV). The present value, also known as a discounted value, can be used to evaluate the fair worth of future income or liabilities. A key idea in finance is the calculation of present value, which is also utilized to determine a company's valuation. Additionally, the value of annuities, spot rates, bond prices, and the computation of personal obligations all depend on this concept.
What is Future Value(FV)?
Future value is the sum of money that will increase with simple or compound interest over time. It is based on the time value of money and is one of the most financial concepts. Using calculations based on the aforementioned growth rate, investors utilize this method to determine the future worth of their investment. Future value, then essentially tells us how much money we will receive from any type of investment in the future.
PV Vs FV | Difference between PV and NPV:
- Future cash flows are present value is its current value. The value of future cash flow after a particular future date is known as future value.
- The worth of an asset at the start of a time period is its present value. The worth of an asset at the end of the time under consideration is its future value.
- The discounted value of future financial sums is known as the present value. The nominal value of future sums of money is known as future value.
- Both the discount rate and the interest rate are factors in present value. Interest rate is the only factor in future value.
- For investors to decide whether to accept or reject a proposition. Present value is more important. Future value simply displays an investment potential gains, therefore its significance for making investment decisions is lower.
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