The article discusses the concept of future value, explaining how the value of money changes over time due to interest or inflation. It introduces the future value formula, defines key variables, and illustrates how to calculate future value using both the formula and a reference table.
An expected value in the future is ‘discounted’ to reflect today’s value, assuming a positive return on investment or inflation rate.
Essentially one dollar in the future is not worth as much as one dollar today; the future dollar is worth less than today’s dollar, hence discounted.
Formula
The FV formula is essentially an inverse of the PV formula and is reflected by the following:
\[FV=PV{{\left( 1+i \right)}^{n}}\]
•Present value (PV) is the value of an investment today, at time zero;
•Future value (FV) is the value of today’s investment at a future point of time;
•‘n’ is the amount of periods, often in years, in the future; and
•‘i’ is the assumed interest rate an investment is projected to earn.
An abbreviated FV table is included here as Table 1.
Example
A simple 1 million dollars investment made today at 5% interest in 20 years would have a value of 2,650,000 dollars as represented in the following formula. This also can be calculated simply from our table by multiplying 1,000,000 dollars by 265/100.
\[FV=\$1,000,000{{\left(1+0.05\right)}^{20}}=\$2,650,000\]
Table 1 Future value Table
Future Value Key Takeaways
Understanding the concept of future value is essential for making informed financial decisions, whether in personal savings, business investments, or long-term planning. By accurately projecting the future worth of current investments, individuals and organizations can better assess opportunities, manage risk, and ensure their financial strategies are aligned with long-term goals.