Lesson FUTURE VALUE OF A PRESENT AMOUNT

Source code of 'FUTURE VALUE OF A PRESENT AMOUNT'

This Lesson (FUTURE VALUE OF A PRESENT AMOUNT) was created by by Theo(13342)

See BASIC FORMULAS AND ASSUMPTIONS USED IN FINANCIAL FORMULAS for an explanation of interest rates, compound interest versus simple interest, number of time periods, definition of time periods and time points, and any other topic basic to the understanding of these financial formulas and how to use them.

FUTURE VALUE OF A PRESENT AMOUNT

{{{FV(PA) = PA * (1+i)^n}}}

FV = future value
PA = present amount
i = interest rate per time period
n = number of time periods

EXAMPLE 1

You invested $20,000 for 5 years at 10% interest compounded annually.  How much money will you have at the end of the 5 years?
{{{FV(PA) = PA * (1+i)^n}}}
n = number of time periods = 5 (since the time period will be expressed in years and you are given years, you do not need to adjust this)
i = interest rate per year = 10% / 100% = .1 per year (since you are given percent interest per year, you need to convert to interest rate per year by dividing 10% by 100%)
PA = Present Amount = $20,000 (This will be entered in the formula as given after removing the $ sign and the commas)
Formula becomes:

{{{FV(PA) = 20000 * (1.1)^5}}} = 32210.2 = $32,210.20

EXAMPLE 2

You invested $20,000 for 5 years at 10% annual interest compounded monthly.  How much money will you have at the end of the 5 years?
This is the same as example 1 except the interest rate is compounded monthly, rather than yearly.
{{{FV(PA) = PA * (1+i)^n}}}
n = number of time periods = 5 * 12 = 60 (since the time periods will be expressed in months and you are given years, you need to multiply the number of years * 12 to get the number of time periods in months)
i = interest rate per month = 10% / 100% / 12 = .0083333333 per month (since you are given percent interest per year, you need to convert to interest rate per month by dividing 10% by 100% and then dividing by 12)
PA = Present Amount = $20,000 (This will be entered in the formula as given after removing the $ sign and the commas)
Formula becomes:

{{{FV(PA) = 20000 * (1.0083333333)^60}}} = 32906.17804 = $32,906.18