Differnce between Present value & Future Value

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Sarvesh Mani Tiwari,CFA(ICFAI) (Querist)
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08 April 2008 Differnce between Present value & Future Value while we are solving quesion some time i confuse, pl advise me what should i keep in mind while solving the problem?

S.Srinivasaraghavan

S.Srinivasaraghavan (Expert)
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08 April 2008 What exactly is your confusion?

Sarvesh Mani Tiwari,CFA(ICFAI)

Sarvesh Mani Tiwari,CFA(ICFAI) (Querist)
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08 April 2008 Wheather we need to apply PV or FV in question

S.Srinivasaraghavan

S.Srinivasaraghavan (Expert)
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08 April 2008 It depends upon the question is it not? Supposing you want to test the viability of a project based on its future earnings. What you will do will be to discount the future earnings by the discounting factor applicable to arrive at the PV of Future earnings and compare it with the cost of investment now.

R.V.RAO

R.V.RAO (Expert)
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08 April 2008 THE TERMS FUTURE VALUE AND PRESENT VALUE ARE USED IN THE CONTEXT OF CAPITAL BUDGETTING AND INVESTMENT DECISIONS ON CAPITAL PROJECTS TO DECIDE ON THE VIABILITY OF THE PROJECTS IN LONG RUN OR TO TAKE A DECISION AS TO WHICH PROJECT TO PREFER IF THERE ARE TWO SIMILAR PROJECTS OFFERING SAME PROFITABILITY ,WITH SAME INVESTMENT .
FUTURE VALUES OR FUTURE CASHFLOWS/EARNINGS ARE DISCOUNTED USING A DISCOUNTING FACTOR TO ARRIVE AT THEIR PRESENT VALUE ,WHICH HELPS IN DECIDING THE PREFERENCE AMONG THE CAPITAL PROJECTS.
SOME TIMES TWO PROJECTS MAY OFFER SIMILAR PROFITS OR INVOLVE EQUAL INVETMENTS.
IN SUCH CONTEXT DCF ( DISCOUNTED CASH FLOW )TECHNIQUE HELPS IN TAKING A RELATIVELY BETTER DECISION OF CHOOSING THE RIGHT PROJECT.
APART FROM DCF AND NPV, PAYBACK PERIOD IS ALSO A TOOL FOR MAKING CAPITAL BUDGETTING DECISIONS .
R.V.RAO

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