Present & Future Values of Multiple Cash Flows

Present & Future Values of Multiple Cash Flows
Coming up next: What is Annuity? - Definition & Formula

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:03 The Time Value of…
  • 1:15 Present and Future…
  • 2:22 Calculating Present Value
  • 2:58 Present Value -…
  • 3:33 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed
Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

$100 today is not worth the same as $100 was 50 years ago, nor is it worth the same as $100 will be in 50 more years. In this lesson, we'll discuss the time value of money and how it influences the present and future values of cash.

The Time Value of Money (a.k.a. Inflation)

The value of cash changes over time; that is simply an economic fact. Did you ever hear a grandparent talk about 'the good ole days' when candy cost a penny and a soda cost a nickel? Now, that same candy and soda - instead of costing a total of six cents - would cost you around $2. Why is that? Has soda and candy become scarcer, and therefore, more valuable? No. But, the cash you use to pay for that soda and candy has lost some of its value. This idea is known as the time value of money.

The time value of money is an important concept, that refers to the economic fact that money generally loses its value over time and the idea that money can potentially be invested in other ways for a more valuable return in the same period. The lost opportunity to invest money differently is called opportunity cost. Inflation, on the other hand, is actually a measurement. Inflation is the rate at which money loses its value due to increases in the costs of goods and services. So the amount of groceries you could buy a year ago with 50 dollars was likely more than what you can buy today with 50 dollars.

Present and Future Value of Cash Flow

The time value of money is an important concept to understand, especially when it comes to investing today's cash into something that will earn cash in the future. Since the money in the future isn't worth as much as the money being invested today, it is necessary to adjust the future amounts for the time value of money. Basically, it is essential to calculate how much money an investment will return, expressed in today's dollars, so that the cost of the investment can be compared to the expected return in an apples-to-apples way.

The future value of a lump-sum of money is calculated using the formula FV = PV(1+i)^n. In this formula, FV is the future value, PV is the lump sum, i is the rate at which it grows, and n is the number of periods into the future. An important issue with this formula is to make sure that the i and n are consistent. If you are measuring n in years, for example, make sure that i is a yearly rate. If you are measuring n in quarters, make sure that i is a quarterly rate.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create An Account
Support