Future Value Formula (Table of Contents)
Future Value Formula
Value of the money doesn’t remain the same; it decreases or increases because of the interest rates and the state of inflation, deflation which makes the value of the money less valuable or more valuable in future. But for financial planning of what we expect the money for our future goals, we calculate the future value of the money by using an appropriate rate in a future formula.
The Future Value formula gives us the future value of the money for the principle or cash flow at the given period.
FV is the Future Value of the sum, PV is the Present Value of the sum,
r is the rate taken for calculation by factoring everything in it, n is the number of years
Example of Future Value Formula
In order to have a better understanding of the concept, we will calculate the future value by using the above-mentioned formula.
Calculate the future value of 15,000 rupees loaned at the rate of 12 percent per annum for 10 years.
To calculate the future value,
R = 12 %
- FV = PV (1+R) n
- FV = 15000 (1 + 0.12) 10
- FV = 46587.72
Here we have put in the Present Value as 15000
A rate of the period which is in years as 0.12
Number of periods which is year 10 years
Here 1.12 rate is raised to power 10, which is in years multiplied by principle 15000.
It is very much used in each and every aspect of finance, whether it’s investments, corporate finance, personal finance, accounting etc.
The future Value of an investment depends on purchasing power it will be having and the return of investments on the capital.
Now, this cumulative of inflation and investment return is factorized in one term as the rate of return for the period.
FUTURE VALUE = PRESENT VALUE + INCURRED RETURN ON INVESTMENT
Now to calculate this future value, we need to understand the value calculated will be used with a compounded rate of return over the years on the present value of the capital.
This can be explained by; taking an example.
Let present an example
10 percent interest
And capital is 1000, so the Future Value will be equal to 1000 + 100 = 1100
Now to calculate for 2 years, we can calculate by using 1100 + 110 = 1210
Which can also be written as 1000 (1.1) ^2 which will make the calculation to 1.21 * 1000 = 1210
This way, we can calculate the future values of any amount when an interest rate is given.
Significance and Use of Future Value Formula
The uses of the Future Value Formula are immense and help us to be very informative and have a view ahead:
- The best use of the future value formula is to find out the value of investments value would be after a period.
- Corporate Finance uses the Future Value formula to make effective decisions for valuing the capital expenses.
- You can calculate the number of installments on a loan amount
- You can calculate the number of savings needed to reach a financial goal when years of compounded returns work for you.
- Calculation of annuity, income by investments over time.
Future Value Calculator
You can use the following Future Value Calculator
|Future Value Formula||=||PV x (1 + r)n|
|=||0 x (1 + 0)0 = 0|
Future Value Formula in Excel (With Excel Template)
The calculation of Future Value in excel is very easy and can take many variables, which can be very difficult to calculate otherwise without a spreadsheet.
Here we will take an example, and I will solve it in the spreadsheet:
What will the amount be after the principle of 10000 is invested for 10 years and 1000 is invested every year thereafter at the rate of 17 percent per annum.
Now what we see here is that we have to be very specific about the function used to calculate future value denote by FV.
Now, as soon as you put in the FV function and start a bracket, the excel asks you to open the bracket and give rate (rate), a number of periods (nper), payment per term (pmt), Present Value (PV) close brackets.
Now following the problem above:
- Rate = B5 = 17%
- Nper = B6 = 10
- PMT = B7 = 1000
- PV = B8 = 10000
- Future Value = FV (B5, B6, B7, B8)
Now, as we press enter in B6, we will get our Future Value.
This excel illustration can be used in google sheets as well. We just need to be clear about the functions and the input.
This has been a guide to a Future Value formula. Here we discuss its uses along with practical examples. We also provide you with Future Value Calculator with a downloadable excel template. You may also look at the following articles to learn more –
- Top Differences – Future vs Option
- Growth Stock vs Value Stock – Comparison
- Strategies of Stock Futures Trading
- Stocks and Mutual Funds