Explain the difference between present and future values.

The difference between present and future value is the time value of money. Present value (PV) is the current worth of a future sum, taking into account factors such as inflation, interest and taxes. Future value (FV), on the other hand, is the amount that an investment will be worth in the future after it has been compounded or invested at a given rate over a specified period of time.

For example: Let’s say you have $1,000 today that you plan to invest for 5 years at 4% interest annually. The present value would be $1,000 but in five years’ time its future value would be $1,210 ($1,000 x 1.04^5). This increase in worth over time is due to the compounding effect –– which means that any return from your initial investment (such as interest) will compound each year thereby increasing its worth even more when calculated several years down the line.

Understanding these principles can help individuals make more informed decisions about their investments by being able to accurately project how much an asset may be worth in the near or distant future; this allows them not only to save money but also generate returns on their investments with greater precision and accuracy than ever before.