FIN 501 The Time Value of Money and Financial Statement Analysis
Solving Present Value and Future Value Problems Introduction The current worth 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. It is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. Methods In present value we have to estimate our future cash flows and convert to present value of money. But in future value already we know exact cash flow but we are just estimate what is this cash flow’s future value. So these both are very useful methods while using separately as per their requirements. But in both of these Future Value is more accurate because we are estimate
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The Time Value of Money and Financial Statement Analysis 2 interest rate only (how much it will increase), cash flow already we know, so there is no longer a gap in between estimated future value and actual future value. In present value we have to estimate both future cash flows and interest rate. Conclusion So we can say Future value is more accurate with compare to present value method. The time value of money works in such a way that it presents the value of the future cash flow to the present date for that reason it is discounted as at an appropriate rate. The reason behind such discounting is that if the same present value money is invested today, then in the future the value would be equal to the future cash flow at that rate of interest. So, the discounting rate is representative of the cost of opportu…………………..
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