What is the relationship between present and future value?

The relationship between present and future value is a concept used to measure how much money an asset or investment will be worth at some point in the future. Present value is the amount of money available today that can be used to generate a given sum at some point in the future, while future value refers to how much money an investment or fixed asset will be worth at a later date when certain conditions are met. This relationship can help investors determine whether it is worthwhile to purchase assets now or wait until later for them to increase in value.

For example, if you have $500 dollars and are considering investing it into stocks, you must weigh both the current and potential future worth of your decision. By understanding the rate of return on your investment, such as 10 percent annually over five years, you can then calculate that after five years your initial $500 would have grown to a total of approximately $806.50 (the “future value”). Alternatively, by using this same information one could also calculate how much they would need today (the “present value”) so that their investment grew to exactly $806.50 after five years – allowing them to decide whether waiting for their investments’ growth is more valuable than spending the cash on hand right away.

The concept of present and future values helps investors understand when it may be most advantageous to buy an asset because they can understand what its approximate worth would be in X number of years from now compared with its current cost. It also assists investors in determining whether waiting for returns from their current investments will provide better results than reinvesting those funds elsewhere immediately – helping people plan for long-term financial success.