The Foundations of A Successful Investment

Calculating the present value of money answers the question;

If an investment promises to pay me a certain amount in future, how much is that sum worth today?

This answers the questions:

I have a certain amount in hand today, how much is it worth in future?

PV= FV / (1+i)n

Where:

PV=Present value 

FV=Future value

i=Interest rate 

n=Number of years.

Interest rates used in the present value or future value formula can also be called discount rate. When considering an investment, it is appropriate to use the opportunity cost of putting your money elsewhere as your interest rate.

This is calculated as:

Opportunity Cost = FO−CO

where:

FO= Forgone option

CO= Chosen option​

Choosing the investment with the highest interest rate (returns rate) is viable but this doesn’t work in all cases, because it might be difficult to estimate the return rates on all available options.

The length of time it takes for each investment to pay their respective returns should also be considered, among other factors like cost of investments, industry differences, the possibility of other cash inflows or compounding interest and any non-quantitative factors.

• The time value of money is vital in making business decisions
• The present value of money can be used to estimate what the profit of your investment is worth in today’s terms.
• Discount rates or interest rates can be determined by considering what return you’ll get from another investment
• And I may or may not have been a middle school business mogul with my lunch. You’ll never know.