What is defined as the difference between future value and present value?

The difference between future value and present value is defined as the discount. This concept arises in the context of time value of money, which recognizes that a sum of money today has a different value than the same sum at a future date due to its earning potential over time.

When calculating future value, we project how much an amount today will grow in the future when considering interest rates and investment periods. Conversely, when determining present value, we estimate how much a future sum of money is worth today, acknowledging that receiving money in the future is less valuable than receiving it immediately.

The discount reflects this difference, as it quantifies the reduction in value that occurs when considering time and interest rates. It essentially represents the cost of waiting or the benefit of receiving money sooner rather than later. Understanding the concept of discount is essential in financial decision-making, as it aids in evaluating the viability and attractiveness of investments over different timeframes.