How to Do Time Value Money Calculations
Know what future value measures., Learn the future value equation., Calculate the future value of an investment.
Step-by-Step Guide
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Step 1: Know what future value measures.
Future value is the value of an asset or amount of money at a specified date in the future.
Future value is calculated by multiplying the present value of the asset or amount of money by the effects of compound interest over a number of years.
This calculation relies on an interest rate that will be earned by the money or asset over those years., The future value equation involves only three variables: the principal amount (also called present value), the interest rate, and the number of periods over which the interest will be accumulating.
It measures the future value that will be attained through the growth of the principal.
The exact equation is as follows:
FV=PV(1+r)n{\displaystyle FV=PV(1+r)^{n}}.
In the equation, the variables represent the following figures:
FV is the future value.
PV is the present value (the principal). r is the interest rate for each period. n is the number of periods.
In many instances, n is a number of years.
This is the case when the r used is an annual interest rate., Imagine that you have invested $5000 in an account that earns five percent annual interest.
You want to know how much the account will be worth in ten years.
Start by inputting all of your variables into the future value equation.
Your equation in this example would look like this:
FV=$5,000(1+0.05)10{\displaystyle FV=\$5,000(1+0.05)^{10}} Note that the interest rate, 5 percent, was converted to a decimal in the equation.
This was done by dividing by 100 (5/100=0.05).
Start the calculation solving the addition in parentheses.
Your equation should now look like this:
FV=$5,000(1.05)10{\displaystyle FV=\$5,000(1.05)^{10}} Solve the exponent.
This is done on a calculator by typing the lower number (1.05 in this case), pressing the exponent button (usually xy{\displaystyle x^{y}}), and then entering the higher number (10 here) and pressing enter.
Your equation should now look like this:
FV=$5,000(1.63){\displaystyle FV=\$5,000(1.63)} Note that the result of the exponent,
1.63, is a rounded figure (the actual result is
1.62889...).
If you don't round this number off, your later calculations will vary from the example.
Solve the multiplication.
This gives you FV=$8,150{\displaystyle FV=\$8,150} The future value of your $5,000 is $8,150.
In other words, your $5,000 will have earned $3,150 in interest over the ten years and will then have a total value of $8,150. -
Step 2: Learn the future value equation.
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Step 3: Calculate the future value of an investment.
Detailed Guide
Future value is the value of an asset or amount of money at a specified date in the future.
Future value is calculated by multiplying the present value of the asset or amount of money by the effects of compound interest over a number of years.
This calculation relies on an interest rate that will be earned by the money or asset over those years., The future value equation involves only three variables: the principal amount (also called present value), the interest rate, and the number of periods over which the interest will be accumulating.
It measures the future value that will be attained through the growth of the principal.
The exact equation is as follows:
FV=PV(1+r)n{\displaystyle FV=PV(1+r)^{n}}.
In the equation, the variables represent the following figures:
FV is the future value.
PV is the present value (the principal). r is the interest rate for each period. n is the number of periods.
In many instances, n is a number of years.
This is the case when the r used is an annual interest rate., Imagine that you have invested $5000 in an account that earns five percent annual interest.
You want to know how much the account will be worth in ten years.
Start by inputting all of your variables into the future value equation.
Your equation in this example would look like this:
FV=$5,000(1+0.05)10{\displaystyle FV=\$5,000(1+0.05)^{10}} Note that the interest rate, 5 percent, was converted to a decimal in the equation.
This was done by dividing by 100 (5/100=0.05).
Start the calculation solving the addition in parentheses.
Your equation should now look like this:
FV=$5,000(1.05)10{\displaystyle FV=\$5,000(1.05)^{10}} Solve the exponent.
This is done on a calculator by typing the lower number (1.05 in this case), pressing the exponent button (usually xy{\displaystyle x^{y}}), and then entering the higher number (10 here) and pressing enter.
Your equation should now look like this:
FV=$5,000(1.63){\displaystyle FV=\$5,000(1.63)} Note that the result of the exponent,
1.63, is a rounded figure (the actual result is
1.62889...).
If you don't round this number off, your later calculations will vary from the example.
Solve the multiplication.
This gives you FV=$8,150{\displaystyle FV=\$8,150} The future value of your $5,000 is $8,150.
In other words, your $5,000 will have earned $3,150 in interest over the ten years and will then have a total value of $8,150.
About the Author
Katherine Hernandez
Committed to making organization accessible and understandable for everyone.
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