The Present and Future Value of Money

 

I honestly can’t believe that I am actually writing this post. I swore to myself that this was something that I would never use in my life and that I could erase it from my brain. Little did I know that the entire concepts of present and future value actually play a huge roll in the way I sell on Amazon.

I’m not kidding – That abstract concept that I learned in my Finance class (and for some reason could never get an answer right on a quiz) has value to me as an Amazon seller (This is just one of those things that I said I would never use. Other include: HTML, Excel, Supply and Demand, etc.).

The concept is actually very simple.

Having $1 in the future is not the same as having $1 right now. Essentially: $1 now does not equal $1 later.

This is used in finance class to show the power of inflation and interest rates. We are going to look at it in a little different way. One that actually means something to us sellers.

Let’s look at it in terms of inventory:

This actually boils down to the question of: “Do I lower my price to sell my inventory now or do I hold out and wait for the price to increase?”

How many of you have had this question before? My guess is that most of your have wondered this at one time or another.

Logic tells you that selling an item for a higher price is the better option right?

There is something extremely important that is left out of equation.

TIME 

If you read my post from last week, then you will know that time is money (literally).

Let’s take the following example and analyze the different outcomes:

I have a set of LEGOS that I purchased for $200 in January of 2016. From my research, I expect that it will have a price of $400 in 2017 and $800 in 2020.

In February, the price raises to $300.

Question: Should you hold or sell your LEGO set?

Answer: It depends. Personally I would sell it

I can hear a few of you screaming at me right now!

CHRIS!!!!! WHY WOULD YOU SELL IT AT $300 IF YOU KNOW IT’S GOING TO BE AT $400 IN 10 MONTHS?!?!?!?! ARE YOU EVEN TRYING TO MAKE MONEY? WHY AM I TAKING ADVICE FROM YOU!?!?!?!

If we actually take a look at the question from a finance point of view, we can see that my answer is actually the best choice.

Why?

Well it’s really simple. I would rather have $100 in profit now than $600 in profit in the future.

Chris…..That doesn’t make sense.

Well look at it this way.

Say I sold the set of LEGOs for $300. I just made $100 or 50% ROI in one month. What happens if I continue to do that?

Let’s look at this convenient little chart:

MonthInvestmentReturnTotal Profit
1$200$0$0
2$200$100$100
3$300$150$250
4$450$225$475
5$675$338$813
6$1,013$506$1,319
7$1,519$759$2,078
8$2,278$1,139$3,217
9$3,417$1,709$4,926
10$5,126$2,563$7,489
11$7,689$3,844$11,333
12$11,533$5,767$17,100
13$17,300$8,650$25,749
14$25,949$12,975$38,724
15$38,924$19,462$58,186
16$58,386$29,193$87,379
17$87,579$43,789$131,168
18$131,368$65,684$196,852
19$197,052$98,526$295,378
20$295,578$147,789$443,168
21$443,368$221,684$664,851
22$665,051$332,526$997,377
23$997,577$498,789$1,496,166
24$1,496,366$748,183$2,244,348
25$2,244,548$1,122,274$3,366,622
26$3,366,822$1,683,411$5,050,034
27$5,050,234$2,525,117$7,575,150
28$7,575,350$3,787,675$11,362,826
29$11,363,026$5,681,513$17,044,339
30$17,044,539$8,522,269$25,566,608
31$25,566,808$12,783,404$38,350,012
32$38,350,212$19,175,106$57,525,118
33$57,525,318$28,762,659$86,287,777
34$86,287,977$43,143,988$129,431,765
35$129,431,965$64,715,982$194,147,747
36$194,147,947$97,073,974$291,221,721
37$291,221,921$145,610,961$436,832,682
38$436,832,882$218,416,441$655,249,123
39$655,249,323$327,624,661$982,873,784
40$982,873,984$491,436,992$1,474,310,776
41$1,474,310,976$737,155,488$2,211,466,264
42$2,211,466,464$1,105,733,232$3,317,199,496
43$3,317,199,696$1,658,599,848$4,975,799,344
44$4,975,799,544$2,487,899,772$7,463,699,117
45$7,463,699,317$3,731,849,658$11,195,548,775
46$11,195,548,975$5,597,774,487$16,793,323,262
47$16,793,323,462$8,396,661,731$25,189,984,994
48$25,189,985,194$12,594,992,597$37,784,977,590

 

If I was able to make 50% profit on my entire investment each month, then I would make $37,784,977,590 by 2020.

I have exaggerated by quite a lot, but I think you get the picture.

$37,784,977,590 in profit is a lot more than $600.

Right?

What I am trying to say is this:

Having your money and return in cash now is worth more than potential profit later if you are able to continue to make a return with your investment.

If you just sold the LEGOS and never invested the money back into inventory, you would be much better off to hold the LEGO set until 2020.

That’s why the answer to the question is: It depends.

It all depends on what you are going to do with the money and what kind of returns you are talking about.

If you have any questions, do not hesitate to ask!

Cheers!

CW

 

 

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