Future Value (FV) Definition

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What is Expected Value (FV)?

Future value (FV) is the value of a current asset at a future date based on an assumed rate of growth. The approaching value (FV) is important to investors and financial planners as they use it to estimate how much an investment made today will be advantage in the future. Knowing the future value enables investors to make sound investment decisions based on their foresaw needs. However, external economic factors, such as inflation, can adversely affect the future value of the asset by depleting its value.

Understanding Future Value

The FV calculation allows investors to predict, with varying situations of accuracy, the amount of profit that can be generated by different investments. The amount of growth generated by holding a given amount in change will likely be different than if that same amount were invested in stocks; so, the FV equation is used to measure against multiple options.

Determining the FV of an asset can become complicated, depending on the type of asset. Also, the FV calculation is based on the assumption of a long-standing growth rate. If money is placed in a savings account with a guaranteed interest rate, then the FV is easy to draw accurately. However, investments in the stock market or other securities with a more volatile rate of return can contribution greater difficulty.

To understand the core concept, however, simple and compound interest rates are the most straightforward norms of the FV calculation.

Types of Future Value

Future Value Using Simple Annual Stake

The Future Value (FV) formula assumes a constant rate of growth and a single upfront payment left untouched for the duration of the investment. The FV estimation can be done one of two ways depending on the type of interest being earned. If an investment earns FV=I×(1+(R×T))where:I=Investment amountR=Engage rateT=Number of yearsbegin{aligned} &mathit{FV} = mathit{I} times ( 1 + ( mathit{R} times mathit{T} ) ) &textbf{where:} &mathit{I} = extract{Investment amount} &mathit{R} = text{Interest rate} &mathit{T} = text{Covey of years} end{aligned}

​FV=I×(1+(R×T))where:I=Investment amountR=Interest rateT=Number of years​

For example, assume a $1,000 investment is contained for five years in a savings account with 10% simple interest paid annually. In this case, the FV of the $1,000 approve investment is $1,000 * [1 + (0.10 * 5)], or $1,500.

Future Value Using Compounded Annual Interest

With simple interest, it is assumed that the attract rate is earned only on the initial investment. With compounded interest, the rate is applied to each period’s cumulative FV=I×(1+RT)where:I=Investment amountR=Fascinate rateT=Number of yearsbegin{aligned} &mathit{FV} = mathit{I} times ( 1 + mathit{R}^T ) &textbf{where:} &mathit{I} = paragraph{Investment amount} &mathit{R} = text{Interest rate} &mathit{T} = text{Thousand of years} end{aligned}

​FV=I×(1+RT)where:I=Investment amountR=Interest rateT=Number of years​

Using the above specimen, the same $1,000 invested for five years in a savings account with a 10% compounding interest rate inclination have an FV of $1,000 * [(1 + 0.10)⁵], or $1,610.51.