Time Value of Money
Time is money. Any sum of money payable in the future is worth less than if it is paid today. This is because that sum of money, if paid today, can be put into an interest bearing bank account to earn interest.
Present value
The present value of that future sum can be determined using the following formula.
PV = FV/(1 + r)n
where PV = Present Value, FV = Future Value, r = interest rate and n = number of years
Example
At 5% interest rate, the present value of a $1000 payment in 3 years' time is only $863.84.
Future value
Correspondingly, there exist a future value of any sum of money can be computed using the following formula.
FV = PV(1 + r)n
where PV = Present Value, FV = Future Value, r = interest rate and n = number of years
Example
At 5% interest rate, the future value of $1000 in 3 years' time is $1157.63.