Importance of understanding the concepts of inflation, present value, and future value

Author: Iloka Benneth Chiemelie
Published: 19th April 2017

Inflation represent the rate at which the price of commodities are rising, present value is the current value of money, while the future value is the expected increase in value if the money is invested (Boundless, n.d.). Thus, these three concept represent important aspect of decision making when it comes to investment. That is to say, if the value of money is expected to increase significantly in the future following an investment, it will be worthy to invest; while high rate of inflation is also a good sign to invest as the value of money will increase faster.

Some of the important terms and concepts that managers must understand in making decisions in today's global economic environment?

·         Inflation – the rate at which price of commodities are increasing.

·         Present value – the current value of asset.

·         Future value – expected increase in asset if invested.

·         Recession – a period of temporal economic decline that features reduction in industrial production (Investopedia, n.d.).

Why these concepts are important to business leaders in Saudi Arabia?

It allows business leaders to understand the best time to invest and what to invest in.

Case: SAMA predicts stable inflation in Q1 (2015) in Saudi Arabia

It was predicted by the Saudi Arabian Monetary Agency (SAMA) that the rate of inflation in the first quarter of 2015 will see a stability in the price of different commodities within the period in question (ARAB NEWS, 2015).

In any case, it was also made known that some of the products could witness inflationary pressure as a result of a royal decree that was issued on January 29^th 2015 that payment of two months’ salary grants be made to all employees in the Saudi Arabia (ARAB NEWS, 2015).

References

ARAB NEWS. (2015, 2 11). SAMA predicts stable inflation in Q1 in Saudi Arabia. Retrieved from ARAB NEWS: http://www.arabnews.com/economy/news/702466

Boundless. (n.d.). The Relationship Between Present and Future Value. Retrieved from Boundless: https://www.boundless.com/finance/textbooks/boundless-finance-textbook/the-time-value-of-money-5/additional-detail-on-present-and-future-values-59/the-relationship-between-present-and-future-value-271-1835/

Investopedia. (n.d.). Present Value And Discounting. Retrieved from Investopedia: http://www.investopedia.com/walkthrough/corporate-finance/3/time-value-money/present-value-discounting.aspx