First and foremost is to understand that concept that the money today as you know, is not is not of the same value was what it was five years back and what it will be after five years what you could buy in terms of hundred dollar today I am sure you will not able to buy the same amount of value or same amount of items after five years and in the ages of our parents and even forget about in the ages of our universities and in our schools. hundred dollars used to be a big amount. So now, in terms of if I in terms of this understanding that the money is losing value, I need to know that What is the rate that it is losing value? Number one, number two, if I am giving you $100 as an investment, and you are promising me to give me $125 after five years?
Yes, definitely This is an app in terms of absolute value. I'm getting five, but I'm getting $25. But definitely if we keep on understanding if he if we start discounting this invest return on the loss of the value of Umma dollar, which is called a discount rate, which could be called an interest rate, that this is an amount This is the value, this is the percentage by which your amount your dollar bill will start will lose its value. So based on a 5% value, you if even I'm giving you 125 after five years I'm actually not even giving you 100 hundred dollar bill back. So, the formula is the present value is equal to future value divided by one plus R. So let us think I'm giving you five at the end of first year with a 5% discount rate. So the future value is 500 and 510 hundred and 15.
Everything when I'm going back to UI view, I will be ending up at $98. The future value the amount of money after 30 years from now, are after the years from now, our is an interest rate also could be called as discount rate. And then n is that time period of money that after five years how much money I will be getting, well if this is the present value, the very simple form of understanding is, as the years zero future value of 50,000. And the future present value 40,000 is equal. But if I'm going with the discount rate of what 10% for the amount that is written there in terms of 35,000, and the return present value is 31,000. Even I'm giving you 35,000 after a year, the return is only 31,000.
The actual value in terms of today is 31,000. I'm giving you 15,000 at the end of second year, but in today's It is only 12,397. So you need to understand that that total money in absolute terms you may be in profit. It may look like good, but are you really getting money out of it or not is what the present value or time value of money comes? septons in the next session, we will go into the net present value, because obviously it will not happen usually in case of business that you invest today and returns start coming after some time. You will be doing investment and return together for next multiple years.
Thank you for now, let's go and see the net present value.