discussion

Provide your thoughts on the impact on starting to save early. How might this influence your future business decisions? 

When evaluating investment opportunities, present value can help you determine if a risk if worth the potential outcome (Ross, Westerfield, & Jordan, 2020). The Present Value of money is an important concept in finance to help understand is the money today worth more than the Future Value, which is what today’s money is worth over a length of time with a percentage of return.  In order to earn a future value of $80,000 in eight years at 20% interest rate, today you would need to a present value to invest of $18,605.45, which would give you $80,000.03 at 20 years. If one were to invest $3004.89 for 18 years at 20% interest, you would end up with $80,000.19. The more time you have the less money you need initially, due to the compounding interest or reinvesting. The lesser at the beginning does not surprise me, as you have more time to earn and that you are earning interest on top of the interest each year.

An example similar to Khan Academy (2019) that these concepts would be important to understand would be a personal situation where you come into a cash settlement. For instance, you are awarded $50,000, which you are given the option to collect now, or you can collect $55,000 in one year from now. To determine is the present value is worth more than the future value we will assume a discount rate of 5%, so we are saying if you took the $50,000 now you could earn in 1 year 5% interest on it. That would mean taking the $50,000 divided by 1.05, giving us a value of $52,380.95 for present value with the discount. That means that the future value of $55,000 is worth today $52,380.95. Therefore, it would be better to accept the $55,000 one year from now. The only thing that would not make it more valuable is if that settlement was needed to pay things like medical bills or debt, in which case you would need to factor additional interest accruing on those debts to see if you in turn would lose money by not taking the initial settlement.