Question

1. Please explain the concept of Present Value and Future Value. Why would you think these calculations are important?

2. What is the Net Present Value of an investment? Why is this important to understand? Why Use Net Present Value?

Answer 1

1. Present value is the current value of a future sum of money or value. Future value is the future value of a current sum of money.

Present value is useful to get an idea of how much the future cash flows are being valued at today. If you are investing X today the present value of future cash flows should be more than X, otherwise there would be no point of investment.

Future value is useful to get an idea of what the current sum will become in future. Suppose you require X in future, you should know.how much to save today to get X in future.

2. Net present value of investment is the sum of initial investment plus the present value of future cash flows discounted at cost of capital.

Net present value is used to estimate whether taking a project would be useful to the company or not.