PV/FV Computations

Question

Upon graduation with an MBA/MSF, the VP of Finance of your firm has asked you to give a presentation to the accounting and finance staff on the value of a working knowledge of PV/FV as related to financial decision-making for the firm. Note: You are not being asked HOW one does PV/FV computations – rather, you are being asked to discuss “WHY are they done and WHY are they useful.” He also wants you to give him a brief executive summary of the main points in your briefing before you go “on stage.”

As you prepare your presentation, you are trying to hone in on three or four major points for your executive summary. Before you present it to your VP of Finance, provide a draft to your colleagues 

Answer 1

Firms have a finite amount of money. PV and FV calculations help firms make decisions about how they will use that money, based on the cash that their investments will generate. The underlying principle behind the calculation is that money is worth more today than it is in the future. There are lots of different applications of this concept- for example: would you rather have $10,000 today or $30,000 in two years? Companies are faced with many decisions like this every day, only with many more moving parts. PV and FV calculations allow you to convert that $30,000 number into a number that you can compare apples-to-apples with the $10,000 figure. The $30,000 may be worth more or less than $10,000 today, depending on what you could do with the $10,000- you'll likely want to choose the higher option.