Business, Legal & Accounting Glossary
Future value, often expressed as FV is a financial term, which describes how much a given amount of money will be worth after interest has accrued.
Future value is referred to as the expected value of the present sum of money in future. Future value is a measurement that tells the amount of money that can be received for any present investment in future. The future value of any investment depends mainly on two things the number of compounding periods and interest rates.
Calculation of future value is quite simple. Future value is used in the calculation of the time value of money.
Future value of money = original amount of money × ( 1 + interest rate per period of time) Number of periods = P * (1 + i) n
Where P = original amount of money (principal amount), n = number of periods, i = Interest rate
Calculation of future value can be done by using simple interest or compound interest.
In this case, only simple interest is taken into account without compounding. Thus, the formula stands as:
FV = PV * (1+rt)
Where PV = present value or the principal amount, t = time measured in years, r = interest rate per annum
This measure is seldom used as compound interest measure.
The formula for calculating future compound interest using compound interest is as follows:
FV = PV * (1 + i)t
Where, PV = present value or principal value, t = number of compounding periods, i = interest rate for that period for which value is calculated
A sum of $20,000 is invested today; the rate of interest drawn is at 6%, which is compounded annually. The amount of money can be withdrawn in 5 years time is the calculation of the future value of money.
Here, we find PV = $20,000, i = 0.06, t = 5
Since, FV = PV * (1 + i)t = 20000 * (1 + .06) 5 = 20000 * (1.3382255776) = 26, 6764.51
Thus, the future value is 26, 6764.51
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This glossary post was last updated: 27th March, 2020 | 0 Views.