InvestorQ : Is the future value (FV) the same as the PV or is it different?

# Is the future value (FV) the same as the PV or is it different?

1 year ago

They are connected but they take different perspectives. For example, if you look at future cash inflows in today’s terms it is present value. If you look at today’s cash flows in terms of what it will be worth after 5 years, it is future value. The future value of a sum depends on the interest rate and the interval of time over which the sum is invested. This is shown with the following formula:

FVt = PV*(1+r)t

where:

FVt = future value of a sum invested for t periods

r = periodic interest rate

PV = present value

t = number of periods until the sum is received

Each period may be a year, a month, a week, etc. The terms in the formula must be consistent with each other; for example, if it is measured in months, then r must be a monthly rate of interest.

Let us assume that you invest a sum of Rs.1,000 for a period of four years at an annual rate of interest of 3%. What is the future value of this sum? In this case, t = 4, r = 3% and PV = Rs.1,000.

FVt = PV(1+r)t

FV4 = 1,000(1+.03)4

FV4 = 1,000(1.12551)

FV4 = Rs.1,125.51

If you calculate the present value of the above sum, it will be exactly equal to Rs.1000. That is how present value and future value are intricately related to each other.

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