See Also:
Valuation Methods
Net Present Value Method
Adjusted Present Value (APV) Method
Present Value (PV)
Opportunity CostFuture Value
Future value is the value of a sum of money at a future point in time for a given
interest rate. The idea is to adjust the present value of a sum of money for the
time value of money over the specified time period.
If the present value is $1.00, and the interest rate is 10%, then the future value of that dollar one year from now would be $1.10. If someone offered you a dollar now or a dollar one year from now, you’d prefer the dollar now. Because by taking the dollar now and investing it, it will be worth more than one dollar a year from now. By applying that same concept to larger quantities of money, you can see that money now is more valuable than the same amount of money later and that it is necessary to consider the time value of money when making financial decisions.
Future value can be calculated with simple interest or compound interest. Practically speaking, it is more useful to calculate future value using compound interest. Simple interest accounts for interest accumulation over time without compounding. It is simply the principal amount adjusted for the annual interest rate. Compound interest accounts for the interest earned on the value of previous interest earned.
Future Value Formula for Simple InterestFuture Value = Present Value x (1 + (Interest Rate x Time Periods))One dollar at 10% for one year: $1.10 = $1.00 x (1 + (.10 x 1))
One dollar at 10% for five years: $1.50 = $1.00 x (1 + (.10 x 5))
Future Value Formula for Compound InterestFuture Value = Present Value x (1 + Interest Rate) Time PeriodsOne dollar at 10% for one year: $1.10 = $1.00 x (1 + .10)1
One dollar at 10% for five years: $1.61 = $1.00 x (1 + .10)5