The future value of money is how much an investment is worth after compounding for a given numbers of terms and with a given interest rate.
For example, you put $100 into a bank account. The interest rate is 6 % p.a. (annual). You want to know what your deposit is worth after 10 years.
The value of your deposit after 10 years is:
Concepts and formulas
The future value is the value of a deposit after compounding for a given numbers of terms and with a given interest rate. The future value (FV) is given by:
The present value is the initial deposit. If you put $100 into a bank account, the present value is $100. The formula for the present value (PV) is given by:
The term is the period between the adding of interest. So the number of terms is the number of times the interest is added.
If the interest rate is 6 % p.a. (annual), there is one term per year.
It is possible to have more than one term per year. The formula for the number of terms (n) is given by:
The interest is what you profit from your deposit every term. The interest is a percentage of the deposit, the interest rate, which is written as a decimal number. That is, 9 % is written as 0,09. The formula for the interest rate (r) is given by:
Where is the formula for future value used?
The formula for future value is used, when you want to save up money, get a loan or when whenever you need to calculate compound interest.
The formula for future value can also be used to project the effect of inflation in a given society increases, like for instance, how much the price of goods and services.