Question

JORDAN: OK, I understand that, and I know the amount of principal invested today can be called the value of the investment, whereas the amount realized after the passage of t period of time is called its value. But what causes the present and future values to be different values?

Answer 1

Answer and explanation:

Present Value tells us how much a future sum of money is worth today given a specified rate of return. This is an important financial concept based on the principle that money received in the future is not worth as much as the equal sum received today.

For instance, if you invest $1,000 today, in three years it would be worth more than the original sum assuming a specified rate of return. Waiting three years to invest the money is three years of lost interest, making the future money worth less than today's $1,000.