What is the difference between present value and future value?
Present value (PV) represents the current worth of a sum of money today, while future value (FV) represents the worth of that same sum at a specified time in the future, assuming it earns interest over time. The core difference lies in the timing of the cash flow relative to the present moment.
Conditions
- Applies to monetary amounts subject to interest rates over time.
- Assumes a positive interest or discount rate for the values to differ.
Reasoning, step by step
- Define present value as the value of money right now, in the present.
- Define future value as the value of that money at a later date.
- Recognize that money grows over time due to interest, making FV typically larger than PV for positive rates.
- Understand that PV discounts future amounts back to today, while FV compounds present amounts forward.
Example
The speaker states, "The present value of money represents the value of money today, right now, in the present. Whereas the future value represents the value of that money in the future."
Common misconceptions
- Believing that $100 today is worth the same as $100 in ten years.
- Confusing the direction of calculation: PV moves backward in time, FV moves forward.
Watch the explanation
0:09 – 0:19Watch this moment ↗
Explore next
Answers are generated from source material and independently checked. Consult the original video or creator if something is unclear.