Future Value (FV) Calculator
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What is Future Value?
Future value (FV) refers to a technique of calculating how much the present value (PV) of an asset or money will be worth at a unique time in future.
It refers to the value of money at a specific date in the future which is equal to the value of a distinctive sum at present.
Future value of money is a concept, which states money available now has a worth more than the same amount of money in future due to its earning capacity.
As money features time value, the future value is obviously predicted to be greater than the current value.
How is interest on FV calculated?
Simple interest is calculated for short term fixed deposit and is considered on number of days.
Compound interest is calculated for fixed deposits above 6 months of tenure. i.e. interest earned for previous compounding period is added to the principal amount for further interest calculation.
Future Value calculation formula (Compound interest):
FV = PV (1 + r)n
Where,
FV = The amount the investor will have at the end, or the future value.
PV = The amount the investor has now, or the present value.
r = The rate of interest the investor will earn on the money.
n = The duration for which the amount is invested.
Example, If an individual invests $1000 in the bank for 5 years at 10% interest, the calculation would be as below.
FV = 1000 [(1 + 0.1)5 ]
FV = 1000 [1 + 0.61051]
FV = 1000 x 1.61051
FV = 1610.51
So, the maturity amount after 10 years would be $1610.51.
Future Value calculation formula (Simple interest):
FV = PV (1 + r)n
Where,
FV = The amount the investor will have at the end, or the future value.
PV = The amount the investor has now, or the present value.
r = The rate of interest the investor will earn on the money.
n = The duration for which the amount is invested.
Example, If an individual invests $1000 in the bank for 5 years at 10% interest, the calculation would be as below.
FV = 1000 [(1 + 0.1)5 ]
FV = 1000 [1 + 0.61051]
FV = 1000 x 1.61051
FV = 1610.51
So, the maturity amount after 10 years would be $1610.51.
Significance of future value:
It is the most used concept in the financial world; primarily based on this, decisions are made to maximize return on investments. It helps shareholders to male investments of their funds wisely. This concept helps investors in many aspects. The importance / significance are as below.
Investment decision is a selection to make funding of money for a long term purpose. Future value assists investors to identify long term case flow statements which will happen at a different point of time. So, if investors have two projects to invest their money in, those two projects can be compared using the future value of the returns. The concept of Future value is generally used in equity or debt securities investment through the use of valuation models while doing investments.
Financial decision is a choice to make to optimize capital structure of the organization. Raising funds for equity, debt or from any different source. Future value helps in this choice by evaluating cost to the company through usage of the effective rate of interest of each source of finance.
Operational decisions : Future value also helps in evaluating creditor cycle and debtors cycle by managing cash collection under current assets management.
Disadvantages of Future value:
Adjustment for inflation : The low interest rates on investment typically come in well below the annual inflation rate.
Fluctuating interest rates or Fluctuating currency values.
Conclusion on Future value:
Future value is a very vibrant concept in the financial world. It helps us to calculate approximate future value or modern funding or present value of future returns. It helps us in making decisions of where to invest and which options to be ignored for investment. There are various financial world problems which can be solved using future value calculation. Future value should be considered before making any investments in any financial instrument like equity, debts, bonds, insurance and various other instruments.