Future Value in Investment Finance

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Future value (FV) is the value that will come in the future, the present sum of money deposited in escrow subject of interest. Future value is one of the major tools dealt with in finance theory, which include the choice between alternatives of investment or financing.

Finding the future value of the present amount, the interest adds an incremental amount until a future date. Mathematically, it doubles the current amount, and in order to find the future value of the present amount, it should be considered as accruing interest.

In principle, the FV method is used in investment calculation to assess an investment’s profitability. It is closely related to the value approach, but instead of calculating the investment’s value at the time of the investment value it is obtained at the end of its tenure.

The method generates a terminal value, the total value of investment cash flows, discounted from now until the end of its term. It is obtained by the calculation of the interest rate of all cash flows, the interest rates as cost of capital.

The future value method is less common in the literature than the present value approach, and it is not used as much in the larger firms. The method is more intuitive than the present value approach, and is often employed by individuals and small businesses. The final value is of course what is expected when saving, thus, it indicates a future face value as a result of an investment.

When depositing a fixed amount each period, future value can be calculated using the following formula: FV = p \ cdot \ left (\ frac ((1 + r) ^ n-1) (R) \ right). Where p – the amount fixed period, R – interest periodically (monthly, quarterly, yearly, etc.) and n – number of interest accrual periods. This formula is appropriate to a situation where the fixed periodic interest rate is applied.

An investment is to be judged positively if it has a higher terminal value than the final value, such as the investment of own funds on capital markets or using them for another project. The yield on an opportunity with the discount rate is determined so that an investment is beneficial at the end.

If you want to save a sum of $10,000 for a period of five years, with a constant annual interest rate of 4.2%, the savings accrue as follows at the end:
FV = 10000 \ cdot (1 +0.042) ^ 5 = 12283.97. An investment is beneficial for the differential calculus of the end-point, if the additional ?EW final value is positive. The additional final value can be determined also by the net present value (additional initial value), the investment multiplied by (1 + i n) at the end of the investment.

Saving deposits of $ 200 a month on a savings plan of three years, with a nominal annual interest of 4.2%, will at the end accrue as follows: FV = 200 \ cdot \ left (\ frac ((1 + \ frac (0.042) (12)) ^ (36) – 1) (\ frac (0.042) (12)) \ right) = 7659.

 

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