Series 79: 3.5.9. Present Value, Future Value, And Discount Rate

3.5.9. Present Value, Future Value, and Discount Rate

Given a choice between receiving $100 now and receiving $100 a year from now, you’d likely choose $100 now. Due to inflation, $100 will be worth less a year from now. Additionally, $100 received now can be invested and hopefully grow in value. This principle is called the time value of money.

Present value is the value today of a future sum of money or stream of payments. Present value is calculated by taking the future amount and applying a given discount rate. That future amount is an estimate based on reasonable assumptions, and is called the future value.

There are two ways to calculate the future value of something that you expect to increase in value at an average rate each year. There’s a formula and a calculator trick to apply that fo