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What Is Present Value Of Money? |
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In the earlier articles, we have understood the time value of money, compounding interest to get the future value of money, we now need to understand what is the present value of money. |
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Simply, the present value is the amount that must be invested NOW to reach a given sum at a given point of time in the future, using the compounding interest rate.
In this case, the present value is actually the opposite of future value. Hence, to get the present value, we can then use the compound interest to be the factor to discount the future value back to the present value.
Earlier illustrated in the article on the future value of money, the $12,100 is receivable in Year 2 using the compound rate of 10%. By using the 10% as the discount rate, we can then discount this future value of $12,100 at 10% back to the present value of $10,000 which is amount that must be invested Now.
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Time Value, Future Value & Present Value Concepts |
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By understanding the time value of money and the future value concept, we can then be able to appraise investment project that has characteristics of up-front cash outflow and future cash inflows which takes a few years to recoup. [refer to earlier articles on time value and future value and the articles on methodologies used in capital investment appraisal] |