Question

1. Explain the difference between present value(PV) and future value(FV) and how these two concepts are applied in the financial world.

2.explain the meaning of time value of money in regard to finance.

Answer 1

1)

Present Value is the sum of discounted values of cash flows coming in the future at the given discount rate. This discount rate can be termed WACC, or required rate of return or MARR or hurdle rate. The future value is the sum of cash flows compounded and added at the end of the period using the reinvestment rate or compounding rate.

2)

Goods worth $ 100 will cost more than $ 100 in the next year due to inflation. This means money loses value over a period of time and hence unless the money earns interest , any amount of money is worth more today , the more sooner it is received.