Prompt: Present value and Future value – In finance we often calculate present and future values....

Prompt: Present value and Future value – In finance we often calculate present and future values. Discuss their uses and the relationship between present and future value.

Requirements: 250 words

Expert Solution

If there are a set of future cash flows in an investment, the value of cash flows can be found either as of today or as of when the cash flows end or future dates. When the value of future cash flows is calculated as of today, it is called the Present value of cash flows and when it is calculated as of a future date, it is called Future value of cash flows.

To calculate the Present value and future value, a discount rate is used which is sometimes called reinvestment rate in the case of future value. In other words, Present value is the sum of discounted future cash flows and future value is the sum of cash flows reinvested at the reinvestment rate on a future date.

PV of cash flows = CF/(1+r)^n

FV of cash flows = CF*(1+r)^n

The relationship between PV and FV

FV = PV*(1+r)^n, where r is the rate and n is the number of periods

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