The distinction between a thrift and a debtor in calculating future value

We will examine the distinction using an example.

The parents of two brothers, one “thrifty” and the other “indebted”, offer them a financial grant in two alternatives.

• Alternative 1 – receive _100k NIS today.
• Alternative 2 – receive _150k NIS in 5 years.

In alternative 1, they will act as follows:

The saver will deposit the money in a savings plan, which provides an annual interest rate of 5% at the bank.

The debtor will repay debts and save on paying annual interest of 15%.

The situation in 5 years

Frugal: If he chooses alternative 1, he will have 127 _k (rounded) in 5 years.

If he chooses alternative 2, he will have 150 _k in 5 years.

Alternative 2 is preferable for him.

Debtor: If he chooses alternative 1, the scope of his debts will decrease in 5 years by 200 _k NIS (rounded) (compared to a situation where he would not repay debts).

If he chooses alternative 2, the scope of his debts will decrease in 5 years by 150 _k NIS.

Alternative 1 is preferable for him.

The popularity of using present value versus future value

Future value is almost never used to calculate profitability.

Present value is the main tool used to examine the viability of investments.