Once again, this will depend on how much you can earn by investing the money you would get today for one year. Let's go through the numbers. Where Present Value is the amount of money you would need today such that if you invested it in a bank today, you would end up with the Future Balance. Notice that we have quietly used the compounding concept here because we assumed that in the second year, the new invested balance includes the interest earned in the first year. The terms present value and future value have very special meanings in the investment world.
Present value refers to today's value of a sum of money to be received in the future.
Future value is easier to understand because you are already used to calculating it whether you know it or not. Future value is how much you would earn by making an investment today and collecting your money in the future. Like present value, you will need to know the rate of investment and the amount of time in which you will receive the cash. In another, we briefly mentioned how inflation affects the stock market , but we didn't really give you a full explanation. We can now give you the details here because we've covered the meaning of present value .