PMP Exam Prep: Present Value vs Future Value

It can be a challenge to select the next project for your team to accomplish. One project management concept that can help you make an informed decision is Net Present Value, which describes the difference between a project’s cash value now versus what it will most likely be in the future. It’s important to understand the fundamentals of Net Present Value before taking your PMP exam, which means we need to take a deeper look at Present and Future Value.

Present Value (PV) and Future Value (FV) are both essential project management formulas that can help with project selection. This Project Management Academy resource will help you understand the difference between each concept and what you will need to know to answer relevant questions on the PMP exam.

How are PV and FV different?

Both PV and FV deal with the concept that the value of money changes over time due to interest, inflation, and other factors. For example, because of inflation rates, $100 today does not have as much purchasing power as it did ten years ago, but it has more purchasing power than it will have in ten more years.

However, PV and FV deal with different time frames. In other words:

• Present Value describes the present worth of a future amount of money. For example, if you have $100 in ten years, you can use the PV formula to calculate how much it would be worth today.
• Future Value describes the future worth of a present amount of money. For example, if you have $100 today, you can use the FV formula to calculate how much it would be worth in ten years.

Both project management concepts are also commonly used in the business world. You are likely to see these concepts on the PMP exam in the context of the project planning and selection processes, so you need to understand their definitions, differences, and use cases.

Defining Present Value

The PV formula calculates the value of a future amount of money in terms of today’s money. This concept is used to help PMP credential holders understand and compare the earning and spending power of projects today and in the future.

The PV formula is below:

In this formula:

• PV = Present Value
• FV = Future Value
• i = Interest Rate
• n = Amount of Time

Including the interest rate and the amount of time in the Present Value formula ensures you properly account for inflation as you compare the cash flow across the project’s lifespan. The Net Present Value (NPV) formula is a different but related formula that takes PV further. This formula describes the difference between the project’s cash value now and in the future. Learn more about the NPV formula in the Project Management Academy guide to the Net Present Value PMP formula.

Example of PV

Imagine you are investing in a project that will earn 3% per year and have a future value of $5,000 in 15 years. What is this project’s present value?

In this example, you would use the following values in the PV formula:

• FV = $5,000
• i = 3% (0.03)
• n = 15

Using the PMP PV formula, you can find the present value of this project is $3,209.24.

You are unlikely to answer questions about calculating PV using this formula on the PMP exam. However, for example, if you are provided with the PV for each year of a project that will finish in five years, you should be able to calculate the project’s NPV. To learn how to calculate NPV, use this NPV formula PMP resource by Project Management Academy.

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Defining Future Value

The Future Value formula calculates the value an amount of money today will have at a particular date in the future based on an assumed interest or inflation rate.

To calculate FV, use the Future Value formula below:

Just as in the Present Value formula, in this formula:

• PV = Present Value
• FV = Future Value
• i = Interest Rate
• n = Amount of Time

This PMP exam concept may be slightly more intuitive since it essentially describes how inflation changes the purchasing power of an amount of money. For example, if you buy something today for $5, you will need more money in the future to buy the same thing.

Example of FV

Imagine you have a budget of $3,000 and are choosing between two projects:

• Project A will earn an interest rate of 5% each year and requires an initial investment, or PV, of $2,000. When Project A finishes in 5 years, what will its FV be?
• Project B will earn an interest rate of 8% each year and requires an initial investment, or PV, of $1,500. When Project B finishes in 5 years, what will its FV be?

Using the FV PMP formula, you can find the following values:

• Project A will have a Future Value of $2,552.56.
  • FV = $2,000 × (1 + 0.05)^5
• Project B will have a Future Value of $2,203.99.
  • FV = $1,500 × (1+ 0.08)^5

Both projects are within budget and take the same amount of time to finish. Since the formula shows Project A has a higher FV, it is a better investment. While the PMP exam may not have questions that ask you to calculate FV using this formula, you may be asked to compare the FV of various projects and decide which one is the better investment.

Application: What to know about FV for the PMP Exam

PV and FV are not exclusively used in project management. These terms are common in business language, so understanding their meanings and use cases is essential. When it comes to the PMP exam, you should understand the difference between PV and FV, along with their use in the project selection process.

While it can be helpful to know how to calculate Present Value and Future Value, it is more vital for PMP exam questions to understand the overall role they play in project selection and how you can use them to compare potential projects. PV and FV can play a role in the workplace if you are working as a project manager or business analyst.

Present Value vs Future Value for the PMP Exam

Present Value and Future Value are two different but related project management concepts you will need to understand to answer questions successfully on the PMP exam. While PV describes how much a future amount of money is worth in terms of today’s money, FV describes how much an amount of money today might be worth in the future.

Both PV and FV help project managers compare the earning power of projects to make informed decisions regarding which projects to pursue. You should understand the difference between PV and FV for the PMP exam and how these concepts are used when selecting projects. You should also understand the related PMP concept of Net Present Value.

Do you have any additional questions about Present Value or Future Value for the PMP exam? Our experts have the answers you need! Get in touch with us anytime, or sign up for our online and in-person classes to receive high-quality instruction that will help you pass the PMP exam.

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