Future Value (FV)
What Is Future Value (FV)?
Future value (FV) is the value of a current asset sometime not too far off in light of an assumed rate of growth. The future value is important to investors and financial planners, as they use it to estimate how much an investment made today will be worth later on. Realizing the future value enables investors to pursue sound investment choices in light of their anticipated requirements. Nonetheless, outside economic factors, like inflation, can adversely influence the future value of the asset by eroding its value.
Grasping Future Value
The FV calculation permits investors to foresee, with shifting degrees of precision, the amount of profit that can be generated by various investments. The amount of growth generated by holding a given amount in cash will probably be unique in relation to assuming that equivalent amount were invested in stocks; in this manner, the FV equation is utilized to compare various options.
Deciding the FV of an asset can become muddled, contingent upon the type of asset. Likewise, the FV calculation depends on the assumption of a stable growth rate. In the event that money is put in a savings account with a guaranteed interest rate, then the FV is not difficult to accurately decide. Be that as it may, investments in the stock market or different securities with a more unpredictable rate of return can introduce greater difficulty.
To figure out the core concept, nonetheless, simple and compound interest rates are the most direct instances of the FV calculation.
Types of Future Value
Future Value Using Simple Annual Interest
The FV formula expects a steady rate of growth and a single up-front payment left immaculate however long the investment would last. The FV calculation should be possible one of two different ways, contingent upon the type of interest being earned. On the off chance that an investment procures simple interest, the FV formula is:
For instance, expect a $1,000 investment is held for a very long time in a savings account with 10% simple interest paid annually. In this case, the FV of the $1,000 initial investment is $1,000 \u00d7 [1 + (0.10 x 5)], or $1,500.
Future Value Using Compounded Annual Interest
With simple interest, it is assumed that the interest rate is earned exclusively on the initial investment. With compounded interest, the rate is applied to every period's cumulative account balance. In the model over, the main year of investment procures 10% \u00d7 $1,000, or $100, in interest. The next year, be that as it may, the account total is $1,100 instead of $1,000; in this way, to work out compounded interest, the 10% interest rate is applied to the full balance for second-year interest earnings of 10% \u00d7 $1,100, or $110.
The formula for the FV of an investment earning compounding interest is:
Utilizing the above model, the equivalent $1,000 invested for a considerable length of time in a savings account with a 10% compounding interest rate would have a FV of $1,000 \u00d7 [(1 + 0.10)5], or $1,610.51.
Features
- There are two different ways of ascertaining the FV of an asset: FV utilizing simple interest, and FV utilizing compound interest.
- Investors are able to sensibly expect an investment's profit utilizing the FV calculation.
- Deciding the FV of a market investment can be testing a direct result of market volatility.
- Future value (FV) is the value of a current asset eventually founded on an assumed growth rate.
