Present Value vs Future Value Differences
The present value is that amount without which we cannot obtain the future value. The future value, on the other hand, is the amount which an individual will get after a certain time period from the cash on hand.
In this article, we look at the differences between Present Value vs Future Value.
What is Present Value?
Present value is a basic concept in the world of finance. Present value is the value, which is today’s value. Suppose you invest today Rs 100 at 10% interest for 1 year. Then after one year, the amount becomes Rs110. This Rs 100, which you are investing today, is called the present value of Rs 110. Future value is that value which will be the value in the future. So here Rs 110 is the future value of Rs 100 at 10%. Present value helps in making decisions on investment, which is based on the current value. So the present value is the current value of the cash flows, which will happen in the future and these cash flows happen at a discounted rate.
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What is Future Value?
Future value, on the other hand, can be defined as the worth of that asset or the cash but at a particular date in the future, and that amount will be equal in terms of value to a particular sum in the present. Future value formula plays a very important role in the world of finance. It is the basis of most important valuation techniques to value a company. With the help of discounting a cash flow that is projected to be generated at a future period, the DCF technique is used in order to value a company or any order asset class that generates a certain amount of cash and is expected to continue generating cash for a particular future period.
Present Value vs Future Value – Infographics
Here we provide you with the top 7 difference between Present Value vs Future Value
Present Value vs Future Value – Key Differences
The key differences between Present Value vs Future Value are as follows –
- Present value is crucial because it is a more reliable value, and an analyst can be almost certain about that value. On the other hand, since the future value is a projected figure, no one can fully rely on that figure as in the future, something can happen, which can affect the projections.
- Present value is defined as the current worth of the future cash flow, whereas Future value is the value of the future cash flow after a certain time period in the future.
- While calculating present value, inflation is taken into account, but while calculating future value, inflation is not considered.
- While calculating present value, discount rate and interest both are considered, but while calculating future value, only interest is considered.
- Present value helps the investors in understanding and deciding whether an investment should be made or rejected. Since future value tells about the future gains from an investment, it does not have a significant role in decision making regarding an investment.
- The present value technique uses discounting to find out the investment’s value on today’s date. The future value technique uses compounding to find out the investment’s future value.
Head to Head Difference Between Present Value vs Future Value
Let’s now look at the head to head difference between Present Value vs Future Value
| Basis – Present Value vs Future Value | Present Value | Future Value | ||
| Meaning | The present value is defined as the current value of the cash flow in the future. It is basically the amount of cash in hand on today’s date. | It is defined as the value of the future cash flow after a certain future period. This is the amount of cash that will be received at a specified future date. | ||
| Time Frame | It is the current value of an asset or investment at the starting of a particular time period. | It is the value of the asset or investment at the end of a particular time period. | ||
| Inflation Effect | For the present value, inflation is considered. | For future value, inflation is not considered. | ||
| Rates Applicable | While calculating present value, both the discount rate and interest rate are taken into account. | While calculating future value, only the interest rate is taken into account. | ||
| Decision Making | Present value is very much important for the investors as it helps to decide whether to invest or not. | Since this reflects the future profits from an investment, it has lesser importance in decision making regarding investments. | ||
| Calculation Method | While calculating present value, the discount is applied to find out the present value of every cash flow, and then all these values are added up to find the investment’s value on today’s date. | Future value calculation uses the compounding technique to arrive at the future value of every cash flow after a certain time period, and then all these values are added up to get the investment’s future value. | ||
| Nature | The present value is the amount that is required to obtain the future value. | Future value is the amount that an individual will get from cash on hand. |
Conclusion
Both present values vs future value are very much important to the investors for making crucial decisions regarding investment decisions. While the present value decides the current value of the future cash flows, future value decides the gains on future investments after a certain time period. Present value is crucial because it is a more reliable value, and an analyst can be almost certain about that value. That’s why it is easier to make a decision based on the present.
On the other hand, the future value is important as without making projections for future values; it is very difficult to make any estimation, whether its budget projections or any asset valuations. But since the future value is a projected figure, no one can fully rely on that figure as in the future, something can happen, which can affect the projections. Present value and future value are connected to each other and have significant importance in the field of finance.
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