The value of an investment does not ever remain the same. It changes with time – appreciating in most cases. There are a lot of things that can be said to be the cause of this change in the value of an investment, but let us narrow it down to time effects. From what can be said about the time value of money, it has been repeatedly proven that time has an effect on money. There are always three things that can ever be done with money at any time
- Keep it inactive; like in the case of saving money in a piggy bank
- Spend it
- Invest it
Of all the three things mentioned above, keeping money inactive is the surest way to waste it (Yes, money can be spent wastefully, but that is not what we are considering at the moment). If you invest it, you may get retain or improve its value; if you spend it, you get to get your money’s worth at the moment which may not be the same tomorrow as a result of the constant inflation that can be likened to the forex market. However, all of these will not make sense it you do not know the present value of what you have.
With an idea of the present value of your money, you can decide on how to spend it. If you invest is, you can keep appropriate track of how much return it gives you, not just by number, but by value. For instance, say you bought a piece of machine, knowing the present value of it will help you to estimate the value of what it might create tomorrow, and some projections on the returns that it is likely to generate.
HOW TO MAKE THE CALCULATIONS:
As a way of calculating the present value of an investment, you can apply the present value to bond investments that is known to bring a certain return, and when the return is due.
This is an investment that is not matured, but since you have an idea of when it will mature and how much it will give, you can find the present value of that amount today. Knowing all the information like how much is to be expected, and when to expect it is you need to find out what it is worth currently
The formula is
PV = FV / (1 + rt)
PV = Present value
FV = Future value
R = rate
T = time
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.