Consider the following problem where you have to choose between receiving 10$ today or 10$ tomorrow, what would you do?
For the following reasons, money available at the present time is worth more than the same amount in the future:
-Uncertainty: you can never be sure that you will earn the 10$ tomorrow.
-Inflation: the 10$ today can allow you to buy more goods than tomorrow in case of inflation.
-Finally, the most important reason which is also a core principle of finance, the 10$ can be invested and yield interests, and the sooner they are invested the higher the amount earned. This principle is also known as present discounted value.
So it is always better to receive the 10$ today rather than tomorrow.
Future value:
Consider that you have a sum S of money and that you are depositing it in a bank account at an annual rate of return r. The future value Fv of your deposit S will be in t years:
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This concept is derived from the time-value of money.
Consider that you are hesitating in starting some project (like opening a restaurant for example) you�ve been studying for some time now.
The restaurant will need some initial investments like buying a place, doing some improvements and decorations, paying some legal fees, buying meats and vegetables�etc. let�s summarize all these initial expenses in C, and let�s consider that the restaurant will generate Ft cash-flows (or losses) each year (the first one received at the end of year 1) for T years. The net present value of this project is:
There is one golden rule: never undertake a project with a negative NPV, but projects with positive NPV are always worth executing.
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