Future value

Definition

Future value is the amount of money an investment will grow to over a period of time at a given interest rate. It accounts for interest earned or inflation over that time period.

5 Must Know Facts For Your Next Test

1. Future value calculations are essential for capital budgeting decisions.
2. The formula for future value is FV = PV * (1 + r)^n, where PV is present value, r is the interest rate, and n is the number of periods.
3. An annuity's future value includes regular payments made at each period plus interest.
4. Future value helps in comparing the profitability of different investment opportunities.
5. Understanding future value supports financial planning by predicting how much current investments will be worth in the future.

Review Questions

• What is the formula used to calculate future value?
• How does understanding future value assist in capital budgeting decisions?
• Explain how an annuity affects the calculation of future value.

Related terms

Present Value: The current worth of a sum that will be received in the future, discounted at a specific interest rate.

Annuity: A series of equal payments made at regular intervals over a specified period.

Time Value of Money: The concept that money available today is worth more than the same amount in the future due to its potential earning capacity.