Assessing Future Value

Every commodity has a value now, and will have a greater or lesser value in the future. This is particularly applicable to currency. The concept of future value is a fundamental of investment and trade, and is know as the time value of money. What was once a simple concept is, however, complex in today's climate of globalization, exchange-rate and interest-rate fluctuations, and inflation.

Understanding this is of key importance in assessing a company's present value and its future value in relation to decisions taken today. Inflation, for instance, will always reduce money's value, but often increases a commodity's value—as with gold in recent years. Interest earned will always increase money's value, while trading in currencies will increase or decrease it, depending on how the respective currencies perform on the world market.

Armed with this understanding, management can make the best-informed decisions about how to generate the maximum value from its money in a given period. It may be best to deposit it in simple interest-bearing accounts, exchange it for a foreign currency, or use it to fund expansion or acquisition. A grasp of this is of particular value to importers and exporters, who can face 90-day differences between delivery and payment, while the currency involved can move in their favor, or against them.