Position 2: It is important to understand the calculations for FV and PV of monetary sums.
Based on time-value-of-money concept, it is necessary to have an understanding on how to calculate Future Value (FV) and Present Value in financial management. In the monetary sums, the two values are equally important when determining the decision to use and apply in the business finance or personal income. Future value can be simply explained as the amount expected to be earned in the coming days. It predicts the value of the business in the future which is unforeseen (Shim, 2012). Present Value refers to the current amount of money that one is in possession. It evaluates the current net worth of the business or personal income of a person. Hence, understanding the calculations of both FV and PV is helpful in that it helps determine how much a business is worth now or in the future. Such knowledge should help one make rational decisions in their investments.
When calculating the FV of a business, one must include the uncertainties that are likely to arise in future. The uncertainties could help make a decision on whether to adopt the FV or PV when deciding on the time to receive payments. In most cases, understanding these variables helps a business get rid of losses that are uncertain (Fabozzi, 2013). The calculations can help a company request for payment now instead of waiting for the unforeseen future. Since at times businesses can collapse due to high debt-ratio, it is necessary to have the orders paid for once delivery is completed. Depending with the risk averse nature of the business managers, they will have to choose between present value and future value when receiving payments. Hence, these calculations are important to understand instead of learning the technological tools used to compute them.
Fabozzi, F. J., & Ake, P. P. (2013). Foundations and applications of the time value of money. Hoboken, N.J: Wiley.
Shim, J. K. (2012). Time value of money and fair value accounting: Tools and concepts. (Time Value of Money and Fair Value Accounting.) Cranbrook: Global Professional.
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