BUS 401 - W2 Journal – Present and Future Values, and Expected Returns
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W2 Journal – Present and Future Values, and Expected Returns
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BUS 401: Principles of Finance
Instructor: Name
February 2, 2015
W2 Journal – Present and Future Values, and Expected Returns
Critically reflect on the importance of present and future values.
The concept of present value (PV) and future value (FV) are based on the time value of money. Let us reflect on the definitions of PV and FV. PV is the amount of present day money in which one has which equal to the future payments (FV) and is discounted by an appropriate discount rate to reflect the time value of money. FV is the amount of money in which an investment with fixed and compounded interest rate will increase at a future date. It is used to calculate the value of money by factoring in the time value of the money when making investment decisions. The time value of money is the known as the money which is received today is worth more than the money to be received at a later date. Financial management in businesses uses the time value of money to compare their investment opportunities today to the cost of future payments. They are able to see if the returns from the investment are greater than their future payments. If the opportunity costs are low then the financial manager will be able to take on the costs of the investment knowing that there will be a gain in the future for the company.
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