2 Dec 2015
The future value of an asset, commonly abbreviated as FV, implies the projected amount of value an asset will probably have in the future. For instance, you can estimate what your car will be worth in a period of ten years, or how much your bank account will be worth in a period of one year. So, Can You Predict the Future Value of Your Investments? Yes, all these things can definitely be measured using the future value formula.
The future value formula is absolutely useful when it comes to figuring out, among many other things, your rate of return and the value of your savings account in a given period of time. The formula comes handy if you wish to save some cash in order to accomplish a retirement milestone.
Future Value (FV) Calculations
The vast majority of FV calculations are just functions that encompass three key aspects:
– Present value
In a nutshell—all the calculations with reference to future value involve determining the amount of revenue an investment generates over a given period of time, say a period of 10 years. Similarly, it takes into account the interest rate provided by that specific investment.
Among the most frequently used FV equations in corporate finance include interest rates. You can also apply the same calculations in determining the overall cost of debt for a corporation. It’s a pretty simple formula that lets you get a rough idea of the total value of your future wealth.
Typically, there are two clear approaches used to measure or calculate the future value of an asset.
1) If you’re dealing with an asset comprising simple annual interest, the equation will be as follows:
Simple Annual Interest=Original Investment x (1 + (Interest Rate x number of years))
2) Nonetheless, if you’re dealing with an asset with interest compounded annually, the equation will be as follows:
Original Investment x ((1+interest rate) ^number of years)
Let’s take a look at the following simple equation:
FV=PV (I + rt)
Does it make any sense to you? Well, it simply implies that for an asset that earns a fixed interest rate, its future value (FV) will be worth the present value (ordinarily abbreviated as PV) multiplied by the function of time duration (t) and interest rate (r) plus 1.
For instance, say you acquired your investment for 100 dollars that generates 1% interest rate each year and you hold the purported investment for a period of 10 years. What will be the future value (FV) of your investment?
Future Value (FV) = $100(1+0.01 x 10)
You get 0.01 in this example, when you multiply the time and rate in the equation. Correspondingly, you get $10 when you multiply this value (0.01) by the present value (PV) of $100. Thus, the answer to the above question brings the total amount of increase that the interest earns in a period of 10 years.
Compound interest is relatively similar to simple interest, but the only notable difference is that accounts that earn compound interest produce interest on the interest achieved, rather than involving the principal balance.
While this difference can add some sense of complexity to the equation when measuring the future value of an asset that earns compound interest, keep in mind that the basic components are just similar. The formula for deriving the compound interest of an investment is as follows: FV = PV [(1 + r)t]