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### Understanding Future Value, Present Value, and Net Present Value

This analysis so far has not taken into account the time value of money. One dollar received today is worth more than one dollar received five years from today. But how much more? That would depend on how much the recipient thinks he could earn on that dollar: in other words, what's an adequate rate of return?

#### Calculating Future Value

A dollar received today and invested in a financial instrument that yields 10% would be worth \$1.10 after one year. \$1.10 is the future value of your dollar given the time period for investment (one year) and the rate of return (10%). After five years, the future value of your dollar would be \$1.61. This value is

or

Conversely, ...

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