Present and Future Value
posted by Sarah Lawsky
I teach the concept of present and future value in my basic tax law class, to help students understand why timing is so important in tax law–that is, why it is better to take a deduction now than next year, and why it is better to recognize taxable income next year rather than this year.
The future value of money is the amount of money you will have some time in the future if you invest a certain amount today. For example, if you put money into your bank account now, how much will be there in ten years, including interest? Of course, you need to know how much you’re starting with, how long that amount grows, and the interest rate it grows at (also the compounding period). The present value of money is how much an amount of money to be received in the future is worth today; you need to know all the same information to figure out present value.
You need to know present and future value whenever you want to figure out how much a stream of payments is worth, and whenever you want to compare amounts that are received or paid at different times.
Here are some examples of present and future value, assuming a 10% rate of interest, if you allow the money to grow for five years and compound it annually:
FV($100) = $161
PV($100) = $62
Here are some additional examples of present and future value:
PV(Comedy) = Tragedy
FV(Ice Cream) = Dippin’ Dots
Please add more in the comments (preferably more along the lines of the latter two than the former two, though if doing present and future value calculations makes you happy, far be it from me to stop you!).