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What is the meaning of Future Value?
The future value represents the value of investment or any asset at any time in the future. It shows us how much the current asset is taken into account shall grow over the future. The value is crucial for investors as it represents the value of current savings in the near future.
In simple, the future value can be calculated by a future value formula to get an idea of how much the investment today shall be worth in the future. It helps financial planners in decision-making with respect to their financial goals. Future value plays an important role in deciding the prospects of a business. Money invested today should be worth more. That is the criteria to decide and future value is the tool that helps us calculate the amount worth in the future.
A good example of future value is that If we invest Rs. 1,000 in savings account today with an interest of 2%. It shall be worth Rs. 1,020 after one year. The amount of Rs 1,020 is the future value.
What is a Future Value formula?
A future value formula is used to calculate the future value of any present asset or investment, it calculates amount the current money shall be worth on fututre date. This formula is used to compute the future value at a specific time in the future at a particular rate of interest.
Here are the details which need for the formula are.
- The number of Periods
- Present Value
- Interest Rate
- Periodic deposits, if any
Let’s take an example to understand how the future value calculator works
Suppose
PV Present Value | Rs 1,736 |
Number of periods | 10 |
Interest rate | 6% |
PMT | Rs. 100 |
Starting amount | Rs. 1,000 |
Total periodic deposits | Rs 1,000 |
Total Interest | Rs. 1,108 |
Future Value | Rs 3,108 |
There are several benefits of using a future value formula and some of them are given below:
- It shows the amount accumulated in the future date when a certain investment is made for a particular time
- Investment prospects can be decided. Investment with a return above inflation is an attractive investment
- It helps in planning a particular return and deposits in an easy manner
How is Future Value Calculated?
Future value is calculated in two different ways. One is the simple interest technique while the other is compounded interest future value.
FV Using Simple Interest
FV formula for calculating the future amount of an asset can be calculated through simple interest formula. Here the type of interest that the investor earns is simple interest
FV = I X ( 1+ (R X T)
Where
I = Investment Amount
R = Interest rate
T = Number of Years
Example –
Assuming Rs. 1,000 is held for five years in savings account with a simple interest of 10%. The FV calculated for the amount is
Rs. 1,000 X ( 1+ ( 0.10X 5)
= Rs. 1,500
FV Using Compounded Interest
In the case of simple interest, interest accrues at initial investment only while in compound interest, interest is applied on each year’s cumulative amount.
The formula for FV of Investment having compounded interest is
FV = I X ( 1+ R) ^T
Where,
I = Investment Amount
R = Interest rate
T = Number of Years
Using the above formula the calculation of future value is calculated on the basis of cumulative amount.
Assuming
Rs. 1,000 is held for five years in a savings account with a compound interest of 10%. The FV calculated for the amount is
1,000 × [(1 + 0.10)5]
= Rs. 1,610.51
How is Future Value Annuity Calculated?
The future value of annuity refers to the future value of a group of payments that are recurring. The Future Value of Annuity is a method of calculating a series of payments that are going to be received at a certain point in time.
P = PMT X ((1+r)^n −1)
r
Where
P= Future value of an annuity
PMT= Amount of each annuity payment
r= Interest rate (also known as the discount rate)
n= Number of periods for which payments will be made
What is Future Value Annuity Calculator?
The Future Value of Annuity calculator is a tool that calculates the value of a series of equal cash outflows which are to be made at any future date. This calculator can help in estimating the future value of any particular periodic payment.
It can also be used to find out the annuity payments, interest rates, period, other values as mentioned.
Conclusion
Future value is fundamental to the financial world. It assists right from financial planning to decision making. Future Value determines the effect of Time Value of Money. It is crucial to make sound financial and investment decisions.
