Future Value-FIN6404

Future Value-FIN6404 - Future Value Future Value is largely...

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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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