
In addition to being able to understand financial statements, it's important to be able to estimate the value of an investment in the present and in the future.
The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity is called the time value of money. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Thus, at the most basic level, the time value of money demonstrates that, all things being equal, it is better to have money now rather than later.
But why is this? A $100 bill now has the same value as a $100 bill one year from now, doesn't it? Actually, although the bill is the same, you can do much more with the money if you have it now because over time you can earn more interest on your money.
By receiving $10,000 today (Option A), you are poised to increase the future value of your money by investing and gaining interest over a period of time. If you receive the money three years down the line (Option B), you don't have time on your side, and the payment received in three years would be your future value. To illustrate, we have provided a timeline:
If you choose Option A, your future value will be $10,000 plus any interest acquired over the three years. The future value for Option B, on the other hand, would only be $10,000. So how can you calculate exactly how much more Option A is worth compared to Option B? Let's take a look.
Future Value Basics
If you choose Option A and invest the total amount at a simple annual rate of 4.5%, the future value of your investment at the end of the first year is $10,450, which is calculated by multiplying the principal amount of $10,000 by the interest rate of 4.5% and then adding the interest gained to the principal amount:
Future value of investment at end of first year: = ($10,000 x 0.045) + $10,000 = $10,450 
You can also calculate the total amount of a oneyear investment with a simple manipulation of the above equation:
 Original equation: ($10,000 x 0.045) + $10,000 = $10,450
 Manipulation: $10,000 x [(1 x 0.045) + 1] = $10,450
 Final equation: $10,000 x (0.045 + 1) = $10,450
The manipulated equation above is simply a removal of the likevariable of $10,000 (the principal amount) by dividing the entire original equation by $10,000.
If the $10,450 left in your investment account at the end of the first year is left untouched and you invested it at 4.5% for another year, how much would you have? To calculate this, you would take the $10,450 and multiply it again by 1.045 (0.045 +1). At the end of two years, you would have $10,920:
Future value of investment at end of second year: = $10,450 x (1+0.045) = $10,920.25 
The above calculation is then equivalent to the following equation:
Future Value = $10,000 x (1+0.045) x (1+0.045) 
Think back to math class and the rule of exponents, which states that the multiplication of like terms is equivalent to adding their exponents. In the above equation, the two like terms are (1+0.045), and the exponent on each is equal to 1. Therefore, the equation can be represented as the following:

We can see that the exponent is equal to the number of years for which the money is earning interest in an investment. So, the equation for calculating the threeyear future value of the investment would look like this:

This calculation means that we don't need to calculate the future value after the first year, then the second year, then the third year, and so on. If you know how many years you would like to hold a present amount of money in an investment, the future value of that amount is calculated by the following equation:
For related reading, see Time Value Of Money: Determining Your Future Worth.
Future Value And Compounding

Investing
Understanding the Time Value of Money
Find out why time really is money by learning to calculate present and future value. 
Investing
Calculating Future Value
Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. 
Investing
Time Value Of Money: Determining Your Future Worth
Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation. 
Managing Wealth
Dissecting the Simple Interest Formula
Simple interest ignores the effect of compounding: it's only calculated on the principal amount. This makes it easier to calculate than compound interest. 
Investing
What is Present Value?
Present value tells us how much a future sum of money is worth today, given a specified rate of return. This is an important financial concept based on the principle that money received in the ... 
Investing
Calculating the Present Value of an Annuity
The present value of an annuity is the current, lump sum value of periodic future payments as calculated using a specific rate. 
Personal Finance
Explaining Equated Monthly Installments
An equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month. 
Trading
Reducing Risk With Options
If you want to use leverage to your advantage, you must know how many contracts to buy. 
Trading
Choosing Between DollarCost And Value Averaging
These are two investing practices that seek to counter our natural inclination toward market timing by canceling out some of the risk.