Question

1. Discuss the present value of money and the future value of money in the context of a professional sport organization. Use equations and examples to illustrate your answer.( 200 words)

Answer 1

Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations. Present value is the concept that states an amount of money today is worth more than that same amount in the future. In other words, money received in the future is not worth as much as an equal amount received today.

1. Present value is the concept that states an amount of money today is worth more than that same amount in the future. In other words, money received in the future is not worth as much as an equal amount received today.

2. Money not spent today could be expected to lose value in the future by some implied annual rate, which could be inflation or the rate of return if the money was invested.

3. Calculating present value involves making an assumption that a rate of return could be earned on the funds over the time period.

PV Formula and Calculation

Present value    =               FV        

                                              ^(1+r)n​         

where:

FV = Future Value

R = Rate of return

n= Number of periods

1. ​Input the future amount that you expect to receive in the numerator of the formula.

2. Determine the interest rate that you expect to receive between now and the future and plug the rate as a decimal in place of "r" in the denominator.

3. Input the time period as the exponent "n" in the denominator. So, if you want to calculate the present value of an amount you expect to receive in three years, you would plug the number three in for "n" in the denominator.

Future value is the value of an asset at a specific date. It measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future assuming a certain interest rate, or more generally, rate of return; it is the present value multiplied by the accumulation function. The value does not include corrections for inflation or other factors that affect the true value of money in the future.

                            The future value (FV) is important to investors and financial planners as they use it to estimate how much an investment made today will be worth in the future. Knowing the future value enables investors to make sound investment decisions based on their anticipated needs. However, external economic factors, such as inflation, can adversely affect the future value of the asset by eroding its value.

a. Future value (FV) is the value of a current asset at some point in the future based on an assumed growth rate.

b. Investors are able to reasonably assume an investment's profit using the future value (FV) calculation.

c. Determining the future value (FV) of a market investment can be challenging because of the market's volatility.

d. There are two ways of calculating the future value (FV) of an asset: FV using simple interest and FV using compound interest.

To determine future value (FV) using simple interest

                                   FV = PV(1+rt)

To determine future value using compound interest:

                                 FV = PV (1+i)^t

Where;

I = Investment Amount

R = Interest Rate

T = Number of years

Comparism and difference between present value and future value

A comparison of present value with future value (FV) best illustrates the principle of the time value of money and the need for charging or paying additional risk-based interest rates. Simply put, the money today is worth more than the same money tomorrow because of the passage of time.

In many scenarios, people would rather have a $1 today versus that same $1 tomorrow. Future value can relate to the future cash inflows from investing today's money, or the future payment required to repay money borrowed today.

While; Future value (FV) is the value of a current asset at a specified date in the future based on an assumed rate of growth. The FV equation assumes a constant rate of growth and a single upfront payment left untouched for the duration of the investment. The FV calculation allows investors to predict, with varying degrees of accuracy, the amount of profit that can be generated by different investments.

                     Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Present value takes the future value and applies a discount rate or the interest rate that could be earned if invested.   

                            Future value tells you what an investment is worth in the future while the present value tells you how much you'd need in today's dollars to earn a specific amount in the future