Key Components of Time Value of Money
Present Value is an amount today that is equivalent to a future payment, or series of payments, that has been discounted by an appropriate interest rate. The future amount can be a single sum that will be received at the end of the last period, as a series of equally-spaced payments (an annuity), or both. Since money has time value, the present value of a promised future amount is worth less the longer the waiting time to receive it.
PV = FV [1/(1+i) n]
FV = Future Value
PV = Present Value
i = the interest rate per period
n= the number of compounding periods
Future Value is the exact opposite of the present value. It is the amount of money that an investment with a fixed, compounded interest rate will grow to by some future date. The investment can be a single sum deposited at the beginning of the first period, a series of equally-spaced payments (an annuity), or both. Since money has time value, it is expected that the future value will be greater than...