This paper examines the mathematical and conceptual relationship between present value (PV) and future value (FV) in the context of health care finance. It explains how compounding interest connects the two measures, how changes in the discount or interest rate cause FV to increase while PV decreases, and why this dynamic matters for health care organizations making long-term investment decisions. Specific attention is given to equipment purchases, loan structures, and payment timing, illustrating how health care facilities can apply PV and FV analysis to secure the best value for expensive medical equipment and extended facility use.
There is a clear relationship between present value and future value factors in finance. Future value (FV) measures the nominal future sum of money that a given sum of money is worth at a specified time in the future, assuming a certain interest rate, or more generally, a rate of return (Smart Notes, 2013). Present value, on the other hand, is the exact value assigned based on the date of payment or a previous series of payments made prior to the inquiry.
Both the future and present value factors are associated with understanding the monetary amount of cash payments or receivables. At present value, it is the amount owed or paid right away, while future value represents a payment or receivable spread over a much longer period of time. The difference in future value represents what is known as the "time value of money" (O'Neill, 2011, p. 1).
Present value and future value are related in that they both reflect compounding interest — the interest rate added to the original principal. Individuals can compute the potential future value using an equation that incorporates the present value, the interest rate, and the number of periods. Present value can similarly be determined by working backward from the future value, applying the interest rate and number of terms.
The two measures are thus related because they share common variables that determine changes in both. Working with future value and present value allows investors to compare multiple dollar amounts — either paid or received — at different points in time. Essentially, the faster a debt is paid, the less interest accrues and the fewer total payments are owed.
The present value is impacted as the discount, or interest, rate increases for a given period of time. Research suggests that "as the interest rate (discount rate) and number of periods increase, FV increases or PV decreases" (Smart Notes, 2013). When interest rates rise, the future value increases while the present value decreases.
The computation of both present and future value depends on the discount or interest rate applicable to the time period involved in the payment. As the interest rate increases, the future value increases because of the extended length of time over which the payment incurs interest. For lenders, this is advantageous; for borrowers, it is less beneficial. On the other hand, if a debt is being paid off, it may be preferable to work with present value because it typically reflects a lower total outlay when payment is made sooner.
These values are important to health care organizations for a number of reasons. Understanding the relationship between future and present value allows healthcare organizations to assess how their investments will play out over the long term. One of the primary goals of health care facilities is to invest in innovative equipment that will not only improve the quality of care provided, but also retain its value as a lasting asset. These organizations need to know whether lump-sum payments for equipment or deferred future payments represent the better financial decision.
For the health care industry, present and future value calculations have significant practical impacts. Using such calculations, health care organizations can understand how their loans will play out over time. Often, health care facilities must arrange payment or loan plans in order to acquire expensive medical equipment or to fund extended use of facilities. Understanding the nature of present and future value can help these organizations secure the best equipment at the best value.
Health care organizations can use the relationship between present and future value to make the best decisions regarding investments in equipment and new health care programs. By understanding how compounding interest, discount rates, and time periods interact to affect both measures, administrators and financial planners can evaluate competing financing options with greater confidence. Whether choosing between lump-sum and deferred payment structures, or assessing the long-term return on a capital investment, a firm grasp of present and future value is an essential tool in health care financial management.
O'Neill, M. (2011). Future value / present value concepts. Accounting Support Page. Retrieved October 10, 2013, from
Smart Notes. (2013). The relationship between present and future value. Boundless. Retrieved from
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