Future value (FV) is the value of a current amount in future, based on assumed growth rate over time or it is used to calculate how much an amount today will be worth on a specific date in future. For example, you will get the future value of $110 if you invest today an amount with the present value of $100 in a bank for 10% interest rate per annum. The idea that a certain amount of money worth more today than in future is based on the time value of money.
The formula to calculate FV is:
Future Value = PV (1+r) n
PV= Present Value
R = Interest rate or rate of return
n = Number of periods
Suppose that you have $1,000, invested in a government’s national saving scheme which will pay 8% interest per annum compounded annually. Do you know how much amount you will get after 3 years?
FV = PV (1+r) n
PV = $1,000
r = 8%
n = 3 years
By putting values in the formula
FV = 1,000 (1+0.08)3 = 1,259.71
According to the time value of money, this means that today the amount of $1,000 will be worth more of $1,259.71 after 3 years.
Point to be noted that although FV provides future value but it does not take account inflation, changing currencies, and interest rates, in result accuracy of the FV is compromised.
Use of Future Value (FV)
In corporate finance, in order to evaluate different investment opportunities like whether to invest in a particular project or not, management uses future values to calculate worth of present cash flows and select the highest value. Individual investors or lenders may use FV to calculate the future worth of their annuities, pension funds, and loans.