- Cash Management
- Consumer and Mortgage Loans
- Debt and Debt Reduction
- Time Value of Money 1: Present and Future Value
- Understand the Importance of Compound Interest and Time
- Understand the Definition of the Term Investment
- Grasp Basic Financial Terminology
- Solve Problems Related to Present Value (PV) and Future Value (FV)
- Time Value of Money 2: Inflation, Real Returns, Annuities, and Amortized Loans
- Insurance 1: Basics
- Insurance 2: Life Insurance
- Insurance 3: Health, Long-term Care, and Disability Insurance
- Insurance 4: Auto, Homeowners, and Liability Insurance
- The Home Decision
- The Auto Decision
- Family 1: Money and Marriage
- Family 2: Teaching Children Financial Responsibility
- Family 3: Financing Children’s Education and Missions
- Investments A: Key Lessons of Investing
- Investments B: Key Lessons of Investing
Solve Problems Related to Present Value (PV) and Future Value (FV)
Present Value (PV)
Let’s suppose you want to determine the current value of the ultimate earnings on an investment. This question could be restated in the following manner: What is the present value of my investment that will mature in n years at i percent interest (or discount rate)?
To solve this problem, you will need to know the future value of your investment, how many years are required for the investment to reach maturity, and what interest or discount rate your investment has. The result of the equation will be a dollar amount that is smaller than the future amount of principal and interest that you will have earned; it is the amount that the investment is worth at the present time.
The present value (PV) equation is as follows:
In this equation, n is the number of periods (years in this case).
The key inputs in the PV equation are as follows:
FV = the future value of the investment at the end of n years
N = the number of years in the future
I = the interest rate, or the annual interest rate or discount rate
PV = the present value, in today’s dollars, of a sum of money that you have invested or plan to invest
After you find these inputs, you can solve for the present value (PV).
You must remember that money you will earn in the future is less valuable than money you have right now; this is because you cannot use future money to earn interest today. You can only earn interest with money you have in hand.