If money is placed in a savings account with a guaranteed interest rate, then the FV is easy to determine accurately. However, investments in the stock market or other securities with a more volatile rate of return can present greater difficulty. To understand the core concept, however, simple and compound interest rates are the most straightforward examples of the FV calculation. The Future Value FV formula assumes a constant rate of growth and a single upfront payment left untouched for the duration of the investment.
The FV calculation can be done one of two ways depending on the type of interest being earned. If an investment earns simple interest , then the Future Value FV formula is:. With simple interest, it is assumed that the interest rate is earned only on the initial investment. With compounded interest, the rate is applied to each period's cumulative account balance.
The formula for the Future Value FV of an investment earning compounding interest is:. Tools for Fundamental Analysis. Financial Ratios. Your Money. Personal Finance. Your Practice. Popular Courses. Fundamental Analysis Tools for Fundamental Analysis. What is Future Value FV? Key Takeaways Future value FV is the value of a current asset at some point in the future based on an assumed growth rate.
Binary iteration is easiest but takes more iterations than more sophisticated iteration methods. I seem to remember that Excel does offer a 'solve by iteration' tool. Binary Iteration: If you know that Payment is between X and Y, then try with the midpoint of this range and see which half of this range the Payment value lies within. Then try again with the midpoint of your new range. And again, and again. Sign up to join this community. The best answers are voted up and rise to the top.
What's the formula to calculate the monthly or lump-sum investment amount for a desired future value? Ask Question. Asked 7 years ago. Active 7 years ago. Viewed 31k times. Lumpsum investment Monthly investment. Are you expecting the FV to adjust based on the inflation rate, e. Else the number given has no place in our calculations. Such that the money saved will decrease in value as result of inflation year after year. Active Oldest Votes.
Note To account for inflation inflate the target final value f accordingly. The demo calculations The periodic investment case assumes periodic investments up to the time that the target final value is achieved. Chris Degnen Chris Degnen 8, 1 1 gold badge 16 16 silver badges 33 33 bronze badges.
Note that there is no 'indexing' of payments to inflation in this formula. Regarding "have to do some guessing" Sign up or log in Sign up using Google. Sign up using Facebook. Sign up using Email and Password. Post as a guest Name. Email Required, but never shown. Featured on Meta. Related 2. Hot Network Questions.
Calculating the future value of an investment is the method you use to generate return. Using this method, you can see the effects of time and the interest rate on your investment. The future value of a lump sum of money allows a small business owner to evaluate an investment, taking into account the current market rate of interest and the amount of time the investment will be held.
If instead, a business owner deposits to a bank account and, subsequently makes a regular deposit on an ongoing basis, Those payments are called an ordinary annuity. Another term for future value is compounding. Compounding occurs when you earn interest on top of interest. There are three methods you can use to calculate the future value of an investment. The first method is to use the mathematical equation. The other two methods are also based on the equation since it is the basis for the principle of time value of money.
Here is an example using the future value formula:. To determine the value of your investment at the end of two years, you would change your calculation to include an exponent representing the two periods:. The continuing periods mean you continue the calculation for the number of payment periods you need to determine.
Incidentally, you can use this formula with any calculator that has an exponential function key. Here are the keys you will press:. Take note that you need to set the investment's present value as a negative number so that you can correctly calculate positive future cash flows. If you forget to add the minus sign, your future value will show as a negative number. Spreadsheets, such as Microsoft Excel, are well-suited for calculating time value of money problems.
The function that we use for the future value of an investment or a lump sum on an Excel spreadsheet is:. The "rate" is the interest rate, "nper" is the number of periods, "pmt" is the amount of the payment made if any, and it must be the same throughout the life of the investment , "pv" is present value, and "type" is when the payment is due.
The payments due value is either a one beginning of the month , or zero end of the month. To use the function in the worksheet, click on the cell you wish to enter the formula in. The formula to calculate the monthly payments to achieve a Future Value is commonly called a "Sinking Fund Payment":.
Make sure that the interest rate matches the investment's compounding frequency. If you are calculating the value of an upfront investment and additional monthly investments, you have to do the calculations as two separate problems. You can do the algebra to reverse the lump sum formula around for Present Value fairly easily, or you can find the answer on Wikipedia.
This is the 2nd edit to the Original post, as I write without thinking the formula for annuity payments had the wrong interest factor and growth factor as I divided the rate by 12 for monthly compounded rate this is a common error in logic the actual factors use annualized rates for interest and growth. This has now been fixed in the two different formulas I have in this post. This is an edit of the Original post that includes indepth explanation and accompanies code for two user defined Excel PV and PMT function that permit gradient in calculating annuity payment and the lump sum.
The formula listed above is correct but since your future value of 1,, includes the growth thus we would use the following form of the formula to find the initial investment. Here we are discounting 1,, at an interest rate for 10 periods then a further discount at growth rate of 9 periods.
The above formula helps find the payment that grows by a rate and earns interest when initial investment is known. When you have only final or maturity value of the investment then the following formula is used. The formulas for PV, FV and PMT that are listed above will only find the correct results when period is in units of 1 and compounding is in units of 1.
The VBA code uses a different formula which happens to be the sum of sequences of geometric series to find the correct answer. This is quite complex work as when you have periods with a fractional part such as It gets even more complex with arithmetic gradient whose closed form formula is listed below but its open form formula requires alot of work. Excel does not offer options for inflation adjusted values, there are however 3rd party Excel add-in such as tadXL that permit Arithmetic and Geometric gradients in the time value of money calculations.
The actual TVM functions in tadXL allow for not only a geometric gradient but also an arithmetic gradient linear growth. And then those functions are much more complicated as they allow for growth period that does not co-incide with the payment period.
And further they allow for a gradient thay may not begin immediately. Using APR as defined here , and neglecting inflation for the demo calculations. To account for inflation inflate the target final value f accordingly. Periodic investments m would continue to be made at the face value, unaffected by inflation. The periodic investment case assumes periodic investments up to the time that the target final value is achieved. And to figure out the Payment for a given FV, you cannot 'reverse' the formula given FV for a stream of payments , but have to do some guessing and iterate to refine your guesses.
Binary iteration is easiest but takes more iterations than more sophisticated iteration methods. I seem to remember that Excel does offer a 'solve by iteration' tool. Binary Iteration: If you know that Payment is between X and Y, then try with the midpoint of this range and see which half of this range the Payment value lies within.
Then try again with the midpoint of your new range. And again, and again. Sign up to join this community.
Website design by Zag Interactive. Contact Us. Future Value of Multiple Deposits. Enter the Initial Investment optional :. Contact Us N. Does Mrs. Smith want to calculate the total value of the account on December 31, ? This has been a guide to Future Value Formula.
Here we learn how to calculate future value FV using its formula along with practical examples, a calculator, and a downloadable excel template. You may also have a look at these articles below to learn more about Corporate Finance. Free Investment Banking Course. Login details for this Free course will be emailed to you.
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