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A dollar today is not the same as a dollar a year from now. This is perhaps the most important concept needed to understand the world of business. Directly related to this is the concept of interest. If you can earn 10% on your money, then a dollar today is worth 10% more in one year, or $1.10. This is the future value. Likewise, a dollar a year from now is worth $0.90 today. This is the present value. A dollar earning 10% interest every year for two years has a future value of $1.21 not $1.20. The extra penny is interest on the interest from the first year (10% of the ten cents earned in year one is one penny). This is compound interest, and has been called the eighth wonder of the world.
Having $100 in your pocket doesn't do anyone any good. It just loses value as time moves on. If you can't find another project of your own that needs these resources, you can put your money in a bank savings account. They will pool your money with others and then loan it to someone else. The formulas to calculate the time value of money are not difficult. If you can't do them in your head, you can find many financial calculators on the internet. FV= PV (1 + i )^N • FV = Future Value What is the future value of $1000 in 5 years if the interest rate is 5%? How much do I need now to have $1000 in 5 years if the interest rate is 5%? |
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