Future Value (FV)

Future Value (FV) is the value of an existing asset at a future date, based on an expected growth rate. It refers to a method of estimating how much a particular asset or cash present value (PV) will be worth in the future at a given time. FV measures the nominal future sum of cash that a given sum of cash is “worth” at a specified time within the future assuming a specific rate, or more generally, rate of return; it’s this value multiplied by the buildup function.

For investors and financial planners, the future value (FV) is significant because they use it to predict how much money an investment made today will be worth in the future. The value does not include inflation adjustments or other variables which will influence the true worth of money in the future. This is used for measurement of the time value of income. Knowing the potential of the future helps investors to make wise investment decisions based on their planned needs. External economic factors, such as inflation, may also adversely affect the asset’s potential value by eroding its value.

Future value (FV) is a significant estimation since it tells financial specialists and people how much speculation made today (present worth) can’t avoid being worth later on. A financial specialist who has some cash has two alternatives: to spend it at the present time or to contribute it. The FV computation permits financial specialists to foresee, with fluctuating degrees of precision, the measure of benefit that can be created by various ventures. The monetary remuneration for sparing it (and not spending it) is that the cash worth will accumulate through the premiums that he will get from a borrower (the ledger on which he has the cash saved).

The amount of growth produced by keeping a given amount in cash is likely to be different than if the same amount were invested in stocks; thus, multiple options are compared using the FV equation. Although calculating future value has its benefits, the future value does not include the following:

  • Adjustments for inflation
  • Fluctuating interest rates, or
  • Fluctuating currency values

Every one of these components will influence the genuine estimation of cash (or resources) later on. Remember that future worth is assessment, not an ensured measurement. In this way, to assess the genuine value of a measure of cash today after a given timeframe, monetary specialists exacerbate the measure of cash at a given loan cost. Deciding the FV of a benefit can get confused, contingent upon the sort of advantage. Additionally, the FV figuring depends on the suspicion of a steady development rate.

The future value (FV) formula requires three numbers:

  • Present value, or how much the asset or cash is worth now (PV)
  • What the annual interest rate is (r)
  • Length of time/how many years the assets or cash will be left (n)

There are two ways of calculating the future value (FV) of an asset:

FV using simple interest – For the lifetime of the investment, the Future Value (FV) formula assumes a steady growth rate and a single upfront payment left unchanged. Depending on the type of interest gained, the FV calculation can be performed in one of two ways. If an investment earns simple interest, then the Future Value (FV) formula is:

FV = I × (1 + (R × T))

Where:

I = Investment amount

R = Interest rate

T = Number of years

FV using compound interest – It is presumed, with clear interest, that the interest rate is only paid on the initial investment. The rate is applied to the total account balance of each period, with compounded interest. The formula for the Future Value (FV) of an investment earning compounding interest is:

FV = I × (1 + RT)

Where:

I = Investment amount

R = Interest rate

T = Number of years

​ Consider the higher return on investment achieved at compound interest vs. simple interest when considering the two potential value figures. For example, the majority of actuarial calculations use the risk-free interest rate which corresponds to the minimum guaranteed rate given the saving account of the bank. If one wants to calculate their change in buying power, then the real interest rate (nominal interest rate minus inflation rate) should be used. Future value ( FV) helps investors to evaluate the potential return on investment. Investors may also use the potential benefits to aid in the potential to create a savings plan for a particular amount.

 

Information Sources:

  1. investopedia.com
  2. investinganswers.com
  3. wikipedia