What is Future value ?

Definition of Future value

Definition of Future value

Future value is defined as the value of an asset at a given future date. It measures the worth of money at any future given date.

The need to measure the future value of current money happened because of the inflation.

Brief Explanation of Future value

There are two ways for it can be calculated

Simple interest rate and compound interest rate.

Simple interest formula applies when interest is expected to receive only on initial investment.

Formula for simple future value is as follows

FV= PV * (1 (r*t))

Where r is the interest rate

And t is the number of years or time period involved.

 

Compound interest means interest is applied annually on investment.

Formula to calculate it as compound interest rate is as follows;

Future value = Present value * (1+ r) ^t

Where r is the interest rate

And t is the number of years or time period involved.

 

Example of Simple Future Value Interest:

Suppose Mr. A invests $ 1000 for5 years. Now how to calculate it’s present value when the interest rate is 10 % is mentioned below;

N = 5

R = 10 %

Putting in formula

FV = $ 1000* (1+(10% *5))

FV = $ 1000 * (1.5)

FV = 1500

 

Example of Simple Future Value Compound Interest:

Using the same above data on compound rate formula the results are as follows

FV = $ 1,000 *((1 + r) ^ t)

FV = $ 1,000* (1.1) ^ 5

FV = $ 1,611

 

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