Future Value is the value of money at a specified date in the future that is equivalent in value to a specified sum today.
Future Value – using Formula
FVn = PV (1 + i)^n
Where FV = the future of the investment at n the end of “n” years
i= the annual interest (or discount) rate
n = number of years
PV = the present value, or original amount invested at the beginning of the first year
Future Value Example
Example: What will be the FV of $100 in 2 years at interest rate of 6%?
FV2= PV(1+i)^2 = $100 (1+.06)^2
$100 (1.06)^2 = $112.36
Increasing Future Value
Future Value can be increased by:
• Increasing number of years of compounding (n)
• Increasing the interest or discount rate, (i)
• Increasing the original investment (PV)
Example: Changing I, N, and PV
(a) You deposit $500 in a bank for 2 years … what is the FV at 2%? What is the FV if you change interest rate to 6%?
FV at 2% = 500*(1.02)^2 = $520.2
FV at 6% = 500*(1.06)^2 = $561.8
(b) Continue same example but change time to 10 years. What is the FV now?
FV at 6% = 500*(1.06)^10= $895.42
(c) Continue same example but change contribution to $1500. What is the FV now?
FV at 6% = 1,500*(1.06)^10 = $2,686.27