Importance Of Present And Future Values

Present value is an amount today which is equal to the future payment or series of payments that has been discounted by an appropriate interest rate. Future value is an amount of money that an investment with fixed and compounded interest rate will increase to by some future date. The quantitative and qualitative factors that must be considered when calculating present and future values are as follows The size of the cash flow the cash flow size to receive is referred as future cash flow. The larger the future cash flow, the larger the present value. Cash flow riskiness riskiness of cash flows is measured by the rate of return that investor would require from alternate investment which would generate a cash flow with the same risk levels. The time to wait for the cash the longer the time to wait, the less valuable the cash flow. The more number of years lowers the cash flow present value. Expected rate of return it can be subjective. It depends on the capital structure. These are the basis for any decision that a firm takes. If an organization has to choose a project then it will estimate a series of cash flows