Time Value of Money

Core Concepts

Future Value (FV)

The value of a present sum after earning interest for n periods at rate r per period.

$$FV = PV \times (1 + r)^n$$

Future value grows exponentially with time, which is the mathematical basis of compound interest.

Present Value (PV)

The current worth of a future sum, discounted back at rate r for n periods. This is the inverse of future value.

$$PV = \frac{FV}{(1 + r)^n}$$

Present value is the cornerstone of all valuation: a dollar today is worth more than a dollar tomorrow because of the opportunity cost of capital.