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Future Value

Future Value Of A Single Amount

Future Value is the amount of money that an investment made today (the present value) will grow to by some future date. Since money has time value, we naturally expect the  future value to be greater than the present value. The difference between the two depends on the number of compounding periods involved and the going interest rate

The relationship between the future value and present value can be expressed as:

FV = PV (1 + i)n

Where:

FV = Future Value
PV = Present Value
i = Interest Rate Per Period
n = Number of Compounding Periods

Example:  You can afford to put $10,000 in a savings account today that pays 6% interest compounded annually.   How much will you have 5 years from now if you make no withdrawals?

PV = 10,000
i = .06
n = 5

FV = 10,000 (1 + .06)5 =  10,000 (1.3382255776) = 13,382.26  

End of Year 1 2 3 4 5
Principal 10,000.00 10,600.00 11,236.00 11,910.16 12,624.77
Interest 600.00 636.00 674.16 714.61 757.49
Total 10,600.00 11,236.00 11,910.16 12,624.77 13,382.26

  Example 2: Another financial institution offers to pay 6% compounded semiannually.  How much will your $10,000 grow to in five years at this rate?

Interest is compounded twice per year so you must divide the annual interest rate by two to obtain a rate per period of 3%.  Since there are two compounding periods per year, you must  multiply the number of years by two to obtain the total number of periods.

PV = 10,000
i = .06 / 2 = .03
n = 5 * 2 = 10

FV = 10,000 (1 + .03)10 =  10,000 (1.343916379) =  13,439.16

Concepts

 
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