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Future Value
Future Value is largely the same as present value but in reverse. The basic idea is the same
except here instead of determining what something is worth today, we want to find out how
much something is worth in the future. For example how much will I have if I invest today.
The basic formula is
(8) FV =
Example: you invest $1000 today at 10% in one year you will have 1000*(1.1)
1
=$1,100
In two years you will have 1,000*(1.1)
2
= 1,210. In three years you will have $1,331, This is
based on the implicit assumption of compound interest. Which means you earn interest on your
interest. This is a powerful concept and can lead to very large amounts when you have enough
time periods over which to accumulate more interest.
Like in the present value discussion we also can use tables to determine a future value factor.
Table A3 gives us future value factors. These are abbreviated as FVIF(r,n). Thus
FV = PV * (FVIF(r,n)) If r=10%, n=3
= $1,000 * 1.331 = $1,331 which is the same we calculated above.
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 Spring '11
 P.Ramanlal
 Finance, Future Value

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