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VMC: What Is Future Value?

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Definition of Future Value

  • It is the value of a current asset at a specific time in the future calculated based on an assumed growth rate.
  • The value of money includes time value; therefore, the future value is expected to be greater than the present value of the investment, considering the growth in investment.

What Impacts Future Value?

  • Factors such as inflation and the rate of return affect the value of money. In turn, that affects the future value of an asset.
  • The future value is calculated based on the interest earned on investments.

How To Calculate Future Value?

  • There are two different ways to calculate the future based on the different interests earned on an asset.
  • Simple Annual Interest Formula:

FV = I * (1 + (R * T))

(Where FV = future value, I = initial investment, R = interest rate, and T =  investment period.)

  • Compound Annual Interest Formula:

FV = I * (1 + R)^T

(Where FV = future value, I = initial investment, R = interest rate, and T = investment period.)

Why is Future Value Important?

  • Investors use future value to estimate how much their investment today will be worth at a future date.
  • Estimating future value helps investors make critical investment decisions that check all their project requirements.
  • Investors can calculate the amount of profit that they will receive from the investments they make using future value.

Future Value in Practice

  • The future value in practice is not a guaranteed measure, but rather an estimate.
  • There is an underlying assumption that a rate of return is earned on the funds over the time period. In practice, interest rates can fluctuate all the time.
  • Adjustments for inflation can also impact the rate of return on investment.
  • The calculation of future value is also not always accurate; it is possible to calculate an accurate future value of an asset with a steady interest rate.
  • Assets with fluctuating interest rates require a more complex future value calculation.
  • Let’s say you have $1,000 and would like to invest it at an interest rate of 5%. How much would you have in 10 years?
  • 1,000 * (1 + 0.05) ^ 10 = $1,628.89 
  • Therefore, you would have $1,628.89 in 10 years.

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.

Posted in Valuation Master Class