Present and Future Values

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On the other hand, the future value is a concept used to find the value of a future investment at the present rates. It is regarded as the sum of a current investment at future date through compounding. Money is expected to vary; it may either increase or decrease in another date other than today. A future value figure is usually larger than the present value. This is due to the effect of inflation and compounding rates. The value of a future value is usually lower in the present time (Porter 43).

Present value is the worth of a future investment today through discounting. This concept is very important in calculating the values of future investments and therefore assists to determine what need be invested today to achieve a set target over an established period of time (Wang and Kenneth 172-175).

Calculation of present value and future value

To get the present value of an investment or a series of cash investments, the future values are multiplied by a factor known as discounting factor. In calculating the present value, an inverse factor is used which reduces the future vale by the rate and time of the future value. Mostly the figure of the present value is usually lesser than that of the future value. This is because it is expected that a sum of money at hand today has a greater value compared to the same amount in the future (Porter 41-44).

To get the future value of a present sum, the present value sum is multiplied by a factor known as compounding factor. These two factors are usually the inverse of each other.

The difference between compounding and discounting

Discounting is a factor that is used to bring down a future value in to the present whereas the compounding factor is used to project a present sum in to the future. Both factors are inversely related. A rate is usually used to calculate this factor. The period of time required also I taken in to account (Porter 45; Koller, Marc and David 19-21).

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Works cited

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Bodie, Zvi, Alex Kane, and Alan J. Marcus. Investments. 2014. Pdf.

Koller, Tim, Marc Goedhart, and David Wessels. Valuation: measuring and managing the value of companies. Vol. 499. John Wiley and Sons, 2010. Print.

Porter, Gary, and Curtis Norton. Financial accounting: the impact on decision makers. Cengage Learning, 2012. Print.

Wang, Mo, and Kenneth S. Shultz. "Employee retirement: A review and recommendations for future investigation." Journal of Management 36.1 (2010): 172-206. Pdf.