Future Value (FV)
What It Is:
How It Works/Example:
There are two ways of calculating future value: simple annual interest and annual compound interest.
Future value with simple interest is calculated in the following manner:
Future Value = x [1 + (Interest Rate x Number of Years)]
For example, Bob invests $1,000 for five years with an interest rate of 10%. The future value would be $1,500.
Future Value = $1,000 x [1 + (0.1 x 5)]
Future Value = $1,000 x 1.5
Future Value = $1,500
Future value with compounded interest is calculated in the following manner:
Future Value = Present Value x [(1 + Interest Rate) Number of Years]
For example, John invests $1,000 for five years with an interest rate of 10%, compounded annually. The future value of John's would be $1,610.51.
Future Value = $1,000 x [(1 + 0.1)5]
Future Value = $1,000 x 1.61051
Future Value = $1,610.51
It is important to remember that simple interest is always based on the present value, whereas compounded interest means that the present value grows exponentially each year.
Why It Matters:
Although calculating future value has its benefits, it is important to remember that future value does not include adjustments for inflation, fluctuating interest rates or fluctuating currency values that are likely to affect the true value of or assets in the future.