What is the meaning of Future Value?
The future value (FV) refers to the value of an asset or cash at a particular date in the future which is equivalent to the value of a specified sum at present. The future value can also be explained as the amount of money which will be reached by a present investment as a result of its growth in the future. As money features time value, the future value is, obviously, expected to be higher than the present value.
Calculating the Future Value
The future value is calculated in the following two ways:
1. For an asset with simple annual interest, the future value is calculated as –
Original Investment X (1+(interest rate*number of years))
2. For an asset featuring interest compounded annually, the future value is calculated as –
Original Investment X ((1+interest rate)^number of years))
For instance, if $1000 is invested for 5 years with a simple annual interest of 10%, the future value of this investment would be $1,500. Similarly, if $1000 is invested for 5 years with an interest rate of 10%, compounded annually, the future value of the investment would be $1,610.51.
Examples for calculating Future Value
Let us suppose that you have $500 savings and wish to start saving $225 every month in an account which gives in an interest at 15% per annum. Now, you want to make your deposits at the end of each month and also want to know the future value of your investment in the next five years. This would be done in the following manner:
- Rate per period = 15% / 12, which comes to 1.25%
- Number of periods = 4 (years) * 12 (months per year), which comes to 48 (months)
- Payment amount = -225.00, as the money paid out is expressed as negative and payment received is expressed as positive.
- Present value = -500, the money which has already been paid to the account.
- The payment is due to be paid at the end of every term.
- At the end of 5 years’ term, the worth of your savings account will be $20982.85