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Short Term Financing

Essay by   •  December 10, 2011  •  Essay  •  296 Words (2 Pages)  •  1,715 Views

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The present value of a single amount has an indirect relationship with future value. Present value implies that a discount rate, or the adjustment to current day's value, is in effect, since the amount is worth less in the present than in the future.

Future Value is an investment whereas the outlay of money is given a fixed compounded interest rate with the expectation of growth in the future. The investment can be a single sum deposited at the beginning of the first period, a series of equally spaced payments (an annuity), or both. Installment payments and leasing are a form of future value. The future value is considered with an applied interest rate. Since money has time value, we naturally expect the future value to be greater than the present value.

Future Value of an Annuity is annuity which consists of a series of equal payments or receipts that occur at evenly spaced intervals. Auto leases and rental payments are examples of FVA. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period for an annuity due. The FVA equation calculates how much payments will be worth at a specified time. When calculating future value, it is interesting to note that future value of a single amount assumes that the money is in hand upfront. For the future value of an annuity the amount received or paid out is occurs at the end of the period and grows to the end of the next.

When determining present value of an annuity, the last payment is discounted all the way back to today and then all the discounted payments are added up. The present value of an annuity would be used in invested funds.

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