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'''Future value''' is the [[value (economics)|value]] of an [[asset]] at a specific date.<ref>{{Cite web|url=https://auth.edgenuity.com/Login/Login/Student|title=Edgenuity for Students|website=auth.edgenuity.com}}</ref> It measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future assuming a certain [[interest rate]], or more generally, [[rate of return]]; it is the [[present value]] multiplied by the [[accumulation function]].<ref>[https://archive.today/20110414165542/http://magic.education2020.com/vocImages/105937-future-value.jpg EDUCATION 2020 HOMESCHOOL CONSOLE. FORMULA FOR CALCULATING THE FUTURE VALUE OF AN ANNUITY] Accessed: 2011-04-14. ([https://archive.today/20110414165542/http://magic.education2020.com/vocImages/105937-future-value.jpg Archived by WebCite®] )</ref>
'''Future value''' is the value of a current sum of money or stream of cash flows at a specified date in the future, given an assumed [[rate of return]] or [[interest rate]]. It reflects the [[time value of money]], which holds that a sum of money has different value at different points in time because it can earn a return if invested.
The value does not include corrections for inflation or other factors that affect the true value of money in the future.  This is used in [[time value of money]] calculations.
 
In [[finance]] and [[economics]], future value is used to express how much a present [[present value|present]] amount will grow when it earns [[simple interest]] or [[compound interest]], and to compare different investment or borrowing options.


==Overview==
==Overview==
Money value [[inflation|fluctuates]] over time: $100 today has a different value than $100 in five years. This is because one can invest $100 today in an interest-bearing bank account or any other investment, and that money will grow/shrink due to the rate of return. Also, if $100 today allows the purchase of an item, it is possible that $100 will not be enough to purchase the same item in five years, because of [[inflation]] (increase in purchase price).
The idea of future value is closely related to the [[time value of money]]. It reflects the fact that a sum of money available today is usually worth more than the same [[Real and nominal value|nominal]] amount received in the future, because money held now can be invested to earn interest or another return.<ref name="CFI_TVM" /><ref name="HBS_TVM" /><ref name="Investopedia_TVM" />


An investor who has some money has two options: to spend it right now or to invest it. The financial compensation for saving it (and not spending it) is that the money value will accrue through the interests that he will receive from a borrower (the bank account on which he has the money deposited).
For example, if £100 is placed in a [[bank account]] that pays 5% interest per year and interest is credited once a year, the balance after one year will be £105. For an investor who expects a 5% return and ignores [[inflation]], the future value of the £100 after one year is therefore £105.<ref name="Pressbooks_TVM" /><ref name="LibreTextsTVM" />


Therefore, to evaluate the real worthiness of an amount of money today after a given period of time, economic agents compound the amount of money at a given interest rate. Most [[actuarial]] calculations use the [[risk-free interest rate]] which corresponds the minimum guaranteed rate provided the bank's saving account, for example. If one wants to compare their change in [[purchasing power]], then they should use the [[real interest rate]] ([[nominal interest rate]] minus [[inflation]] rate).
The concept helps individuals and firms decide whether to spend money now, or to defer spending by saving or investing. Comparing the future value of saving with the [[utility]] of current consumption highlights the [[opportunity cost]] of using funds immediately. In corporate and investment finance, future values are used together with [[present value]] to analyse long term projects and securities such as [[bond (finance)|bonds]] and [[annuity|annuities]].<ref name="HBS_TVM" /><ref name="AnalystPrep_TVM" />


The operation of evaluating a present value into the future value is called capitalization (how much will $100 today be worth in 5 years?). The reverse operation which consists in evaluating the present value of a future amount of money is called a [[discounting]] (how much $100 that will be received in 5 years- at a [[lottery]], for example -are worth today?).
Inflation affects the [[purchasing power]] of future cash flows. A calculation that uses a nominal interest rate gives a nominal future value that does not adjust for inflation. For example, if £100 earns a nominal interest rate of 5% over one year, the nominal future value is £105, but if prices rise by about 2% over the same period, the real value of that future amount is closer to £103 in terms of current prices. Analysts often distinguish between nominal and [[real interest rate]]s and may use real discount rates or inflation adjustments, such as those implied by the [[Fisher equation]].<ref name="BusinessInitiative_TVM" /><ref name="LibreTextsTVM" />
 
It follows that if one has to choose between receiving $100 today and $100 in one year, the rational decision is to cash the $100 today. If the money is to be received in one year and assuming the savings account interest rate is 5%, the person has to be offered at least $105 in one year so that two options are equivalent (either receiving $100 today or receiving $105 in one year). This is because if you have cash of $100 today and deposit in your savings account, you will have $105 in one year.


==Simple interest==
==Simple interest==
To determine future value (FV) using [[simple interest]] (i.e., without compounding):
To determine future value (FV) using [[simple interest]] (that is, without compounding), the future value of a single amount is given by:
:<math>\text{FV} = \text{PV}(1+rt)</math>
where <math>\text{PV}</math> is the [[present value]], <math>r</math> is the simple interest rate per time period in decimal form, and <math>t</math> is the number of time periods.<ref name="LibreTextsSimple"/>


:<math>FV = PV(1+rt)</math>
The simple interest earned over the period is <math>\text{PV} r t</math>, so the future value is the sum of the original principal and interest.<ref name="LibreTextsSimple"/><ref name="Dummies_FV" /><ref name="Pressbooks_TVM" /> For example, if £100 earns simple interest at 5% per year for three years, the future value is <math>\text{FV} = 100(1 + 0.05 \times 3) = 115</math>, because the total interest is <math>100 \times 0.05 \times 3 = 15</math>.


where ''PV'' is the [[present value]] or principal, ''t'' is the time in years (or a fraction of year), and ''r'' stands for the per annum [[interest]] rate. [[Simple interest]] is rarely used, as compounding is considered more meaningful {{Citation needed|date=January 2010}}. Indeed, the Future Value in this case grows linearly (it's a [[linear function]] of the initial investment): it doesn't take into account the fact that the interest earned might be compounded itself and produce further interest (which corresponds to an [[exponential growth]] of the initial investment -see below-).
Because interest is applied only to the principal, the future value under simple interest increases in proportion to <math>t</math>, and so is a [[linear function]] of time. For a given nominal rate and period, [[compound interest]] produces a higher future value as interest is earned on both the principal and previously accrued interest.<ref name="InvestopediaSimpleCompound"/>
{{Expand section|date=January 2010}}


==Compound interest==
==Compound interest==
To determine '''future value''' using [[compound interest]]:
To determine the future value using [[compound interest]], the future value <math>\text{FV}</math> of a single amount invested at a periodic interest rate is:
:<math>\text{FV} = \text{PV}(1+i)^n</math>
where <math>\text{PV}</math> is the [[present value]], <math>i</math> is the interest rate per compounding period, and <math>n</math> is the number of compounding periods.<ref name="isbn0-324-65114-7" /><ref name="LibreTextsTVM" /> For a given present value and interest rate, the future value increases as the number of compounding periods increases, and the growth of the investment over time is [[exponential function|exponential]].<ref name="Investopedia_Compounding" />
 
Solving this expression for <math>n</math> gives the number of compounding periods needed for an amount to reach a specified future value. For example, at an interest rate of 5% per year, a lump sum doubles in value when <math>(1 + 0.05)^n = 2</math>, which corresponds to a doubling time of a little over fourteen years. Approximate mental rules for doubling time, such as the [[Rule of 72]], use the same relationship between the growth factor and the number of periods.<ref name="LibreTextsTVM" /><ref name="CFI_TVM" />
 
===Multiple compounding periods and effective annual rate===
If the stated nominal annual interest rate is <math>j</math> and interest is compounded <math>m</math> times per year, the interest rate per compounding period is <math>j/m</math>. When the time to maturity is <math>t</math> years, so that there are <math>n=mt</math> compounding periods, the future value of a present amount can be written as:
:<math>\text{FV} = \text{PV} \left(1 + {j \over m}\right)^{mt}</math>.<ref name="CFI_TVM" />
 
For example, if an account pays interest at a nominal rate of 6% per year compounded twice a year, the periodic rate is 3% and there are two compounding periods in a year. The effective annual rate <math>r</math> is then:
:<math>(1 + 0.03)^2 - 1 \approx 0.061</math><ref name="CFI_EAR" />
so the investment grows over the year by about 6.1%.
 
More generally, if a nominal annual rate <math>j</math> is compounded <math>m</math> times per year, the [[effective interest rate|effective annual rate]] <math>r</math> is:
:<math>r = \left(1 + {j \over m}\right)^m - 1.</math><ref name="CFI_EAR" />
===Continuous compounding===
If interest is [[Compound_interest#Continuous_compounding|compounded continuously]] at a nominal annual rate <math>j</math>, the effective annual rate is:
:<math>r = e^{j} - 1</math>
which is the limit of the previous expression as the number of compounding periods per year tends to infinity.<ref name="CFI_EAR" /> For an investment held for <math>t</math> years, the future value of a present amount under continuous compounding is:
:<math>\text{FV} = \text{PV} e^{j t}.</math><ref name="CFI_TVM" />
===Future value of an annuity===
Compound interest formulas apply to a series of level payments or deposits. The future value <math>\text{FV}_\text{annuity}</math> at the end of <math>n</math> periods of an [[annuity (finance theory)|ordinary annuity]], with payment <math>\text{PMT}</math> made at the end of each period and interest rate <math>r</math> per period, is:
:<math>\text{FV}_\text{annuity} = \text{PMT} \frac{(1 + r)^n - 1}{r}.</math><ref name="isbn0-07-140665-4" /><ref name="Investopedia_FVAnnuity" />
Here <math>r</math> is the interest rate per period, <math>n</math> is the number of payments and <math>\text{PMT}</math> is the fixed payment amount. This formula is used to calculate the future value of a stream of equal contributions to a [[savings]] or [[retirement]] account and to analyse [[loan]] repayment schedules.<ref name="Investopedia_FVAnnuity" />
 
==Applications==
Future value calculations are widely used in [[personal finance]] to plan for savings goals and retirement. Households use the future value of a single deposit or a series of regular deposits to estimate how much money will be available at a target date in a [[savings account]] or [[retirement]] plan.<ref name="Pressbooks_TVM" /><ref name="LibreTextsTVM" /> For example, a family saving towards a house deposit or future education costs may compare different contribution amounts and time horizons by calculating the future value of regular monthly payments.


:<math>FV = PV(1+i)^t</math><ref name="isbn0-324-65114-7">{{cite book |author1=Francis, Jennifer Yvonne |author2=Stickney, Clyde P. |author3=Weil, Roman L. |author4=Schipper, Katherine |title=Financial accounting: an introduction to concepts, methods, and uses |publisher=South-Western Cengage Learning |year=2010 |page=806 |isbn=978-0-324-65114-0 }}</ref>
In [[bank]]ing and consumer credit, lenders and borrowers consider the future value of [[loan]] balances and other obligations. For example, a contract may specify a single [[balloon payment]] at a future date, or the amount that will be outstanding if the loan is repaid early. These future cash amounts depend on the interest rate and compounding convention stated in the agreement.<ref name="CFI_TVM" /><ref name="Investopedia_TVM" />


where ''PV'' is the [[present value]], ''t'' is the number of compounding periods  (not necessarily an integer), and ''i'' is the interest rate for that period. Thus the future value [[Exponential growth|increases exponentially]] with time when ''i'' is positive. The [[Compound annual growth rate|growth rate]] is given by the period, and ''i'', the interest rate for that period. Alternatively the growth rate is expressed by the interest per unit time based on [[Compound interest#Continuous compounding|continuous compounding]]. For example, the following all represent the same growth rate:
In corporate and investment finance, future value is used together with [[present value]] in [[discounted cash flow]] and [[net present value]] analysis. Projected cash flows from an [[investment]] or a [[project appraisal|capital project]] can be discounted to present value or compounded to a common future date in order to compare alternatives.<ref name="HBS_TVM" /><ref name="AnalystPrep_TVM" />
*3 % per half year
*6.09 % per year ([[effective annual rate]], [[rate of return|annual rate of return]], the standard way of expressing the growth rate, for easy comparisons)
*2.95588022 %  per half year based on continuous compounding (because ln 1.03 = 0.0295588022)
*5.91176045 %  per year based on continuous compounding (simply twice the previous percentage)


Also the growth rate may be expressed in a percentage per period ([[nominal interest rate|nominal rate]]), with another period as compounding basis; for the same growth rate we have:
Basic future value calculations usually assume a constant interest or discount rate over time and do not directly incorporate inflation, taxes or uncertainty. In practice, analysts may work with real, term-dependant rates that adjust for [[inflation]], and incorporate risk by using different discount rates or by modelling cash flows under different scenarios.<ref name="BusinessInitiative_TVM" /><ref name="LibreTextsTVM" />
*6% per year with half a year as compounding basis


To convert an interest rate from one compounding basis to another compounding basis (between different periodic interest rates), the following formula applies:
==See also==
*[[Lifetime value]]
*[[Present value]]
*[[Time value of money]]
*[[Simple interest]]
*[[Compound interest]]
*[[Annuity (finance theory)]]


:<math>i_2=\left[\left(1+\frac{i_1}{n_1}\right)^\frac{n_1}{n_2}-1\right]{\times}n_2</math>
==References==
<references>


where
<ref name="CFI_TVM">{{cite web |title=Time Value of Money |website=Corporate Finance Institute |url=https://corporatefinanceinstitute.com/resources/valuation/time-value-of-money/ |access-date=18 November 2025}}</ref>
''i''<sub>1</sub> is the periodic interest rate with compounding frequency ''n''<sub>1</sub> and
''i''<sub>2</sub> is the periodic interest rate with compounding frequency ''n''<sub>2</sub>.


If the compounding frequency is annual, ''n''<sub>2</sub> will be 1, and to get the annual interest rate (which may be referred to as the [[effective interest rate]], or the [[annual percentage rate]]), the formula can be simplified to:
<ref name="LibreTextsTVM">{{cite web |title=Explain the time value of money and calculate present and future values of lump sums and annuities |website=Business LibreTexts |url=https://biz.libretexts.org/Bookshelves/Accounting/Managerial_Accounting_(OpenStax)/11%3A_Capital_Budgeting_Decisions/11.04%3A_Explain_the_Time_Value_of_Money_and_Calculate_Present_and_Future_Values_of_Lump_Sums_and_Annuities |publisher=LibreTexts / OpenStax |date=2023 |access-date=18 November 2025}}</ref>


:<math>r = \left( 1 + { i \over n } \right)^n - 1 </math>
<ref name ="Investopedia_TVM">{{cite web |title=Time Value of Money: What It Is and How It Works |website=Investopedia |url=https://www.investopedia.com/terms/t/timevalueofmoney.asp |access-date=18 November 2025}}</ref>


where ''r'' is the annual rate, ''i'' the periodic rate, and ''n'' the number of compounding periods per year.
<ref name="HBS_TVM">{{cite web |title=Time Value of Money: A Primer |website=Harvard Business School Online |url=https://online.hbs.edu/blog/post/time-value-of-money |date=16 June 2022 |access-date=18 November 2025}}</ref>


Problems become more complex as you account for more variables.  For example, when accounting for [[Annuity (finance theory)|annuities]] (annual payments), there is no simple ''PV'' to plug into the equation. Either the ''PV'' must be calculated first, or a more complex annuity equation must be used. Another complication is when the interest rate is applied multiple times per period. For example, suppose the 10% interest rate in the earlier example is compounded twice a year (semi-annually).  Compounding means that each successive application of the interest rate applies to all of the previously accumulated amount, so instead of getting 0.05 each 6 months, one must figure out the true annual interest rate, which in this case would be 1.1025 (one would divide the 10% by two to get 5%, then apply it twice: 1.05<sup>2</sup>.)  This 1.1025 represents the original amount 1.00 plus 0.05 in 6 months to make a total of 1.05, and get the same rate of interest on that 1.05 for the remaining 6 months of the year.  The second six-month period returns more than the first six months because the interest rate applies to the accumulated interest as well as the original amount.
<ref name="Pressbooks_TVM">{{cite web |title=Understanding and Appreciating the Time Value of Money |website=Personal Finance |publisher=Pressbooks |url=https://pressbooks.pub/personalfinance/chapter/chapter-3-time-value-of-money/ |access-date=18 November 2025}}</ref>


This formula gives the future value (FV) of an ordinary [[Annuity (finance theory)|annuity]] (assuming compound interest):<ref name="isbn0-07-140665-4">{{cite book |author=Vance, David |title=Financial analysis and decision making: tools and techniques to solve financial problems and make effective business decisions |publisher=McGraw-Hill |location=New York |year=2003 |page=99 |isbn=0-07-140665-4 }}</ref>
<ref name="AnalystPrep_TVM">{{cite web |title=Introduction to the Time Value of Money in Finance |website=AnalystPrep |url=https://analystprep.com/cfa-level-1-exam/quantitative-methods/introduction-to-the-time-value-of-money-in-finance/ |date=6 August 2023 |access-date=18 November 2025}}</ref>


:<math>FV_\mathrm{annuity} = {(1+r)^n - 1 \over r} \cdot \mathrm{(payment\ amount)}</math>
<ref name="BusinessInitiative_TVM">{{cite web |title=The Time Value of Money |website=Business Initiative |url=https://www.businessinitiative.org/section/time-value-of-money/ |date=3 November 2023 |access-date=18 November 2025}}</ref>


where ''r'' = interest rate; ''n'' = number of periods. The simplest way to understand the above formula is to cognitively split the right side of the equation into two parts, the payment amount, and the ratio of compounding over basic interest. The ratio of compounding is composed of the aforementioned effective interest rate over the basic (nominal) interest rate. This provides a ratio that increases the payment amount in terms present value.
<ref name="Dummies_FV">{{cite web |last=Boyd |first=Kenneth W. |title=How to Predict the Future Value of Investments |website=Dummies |publisher=John Wiley & Sons |url=https://www.dummies.com/article/business-careers-money/business/accounting/general-accounting/how-to-predict-the-future-value-of-investments-169216/ |date=26 March 2016 |access-date=18 November 2025}}</ref>


==See also==
<ref name="LibreTextsSimple">{{cite web |title=6.1: Simple and Compound Interest |website=Statistics LibreTexts |publisher=LibreTexts |url=https://stats.libretexts.org/Courses/Fresno_City_College/New_FCC_DS_21_Finite_Mathematics_-_Spring_2023/06%3A_Mathematics_of_Finance/6.01%3A_Simple_and_Compound_Interest |date=10 October 2023 |access-date=18 November 2025}}</ref>
*[[Lifetime value]]
 
*[[Present value]]
<ref name="InvestopediaSimpleCompound">{{cite web |last=Picardo |first=Elvis |title=Simple vs. Compound Interest: Definition and Formulas |website=Investopedia |date=4 April 2025 |url=https://www.investopedia.com/articles/investing/020614/learn-simple-and-compound-interest.asp |access-date=18 November 2025}}</ref>
*[[Time value of money]]
 
<ref name="Investopedia_Compounding">{{cite web |title=Compounding Interest: Formulas and Examples |website=Investopedia |url=https://www.investopedia.com/terms/c/compounding.asp |access-date=18 November 2025}}</ref>
 
<ref name="Investopedia_FVAnnuity">{{cite web |title=Future Value of Annuity: Calculation Formulas & Key Insights |website=Investopedia |url=https://www.investopedia.com/terms/f/future-value-annuity.asp |access-date=18 November 2025}}</ref>
 
<ref name="CFI_EAR">{{cite web |title=Effective Annual Interest Rate (EAR) |website=Corporate Finance Institute |url=https://corporatefinanceinstitute.com/resources/commercial-lending/effective-annual-interest-rate-ear/ |access-date=18 November 2025}}</ref>
 
<ref name="isbn0-07-140665-4">{{cite book |last=Vance |first=David E. |title=Financial analysis and decision making: tools and techniques to solve financial problems and make effective business decisions |publisher=McGraw-Hill |location=New York |year=2003 |page=99 |isbn=0-07-140665-4}}</ref>
 
<ref name="isbn0-324-65114-7">{{cite book |last1=Francis |first1=Jennifer Yvonne |last2=Stickney |first2=Clyde P. |last3=Weil |first3=Roman L. |last4=Schipper |first4=Katherine |title=Financial accounting: an introduction to concepts, methods, and uses |publisher=South-Western Cengage Learning |year=2010 |page=806 |isbn=978-0-324-65114-0}}</ref>


==References==
</references>
{{reflist}}


[[Category:Theory of value (economics)]]
[[Category:Theory of value (economics)]]
[[Category:Mathematical finance]]
[[Category:Mathematical finance]]

Latest revision as of 14:09, 20 December 2025

Template:Short description Script error: No such module "For". Template:Refimprove Future value is the value of a current sum of money or stream of cash flows at a specified date in the future, given an assumed rate of return or interest rate. It reflects the time value of money, which holds that a sum of money has different value at different points in time because it can earn a return if invested.

In finance and economics, future value is used to express how much a present present amount will grow when it earns simple interest or compound interest, and to compare different investment or borrowing options.

Overview

The idea of future value is closely related to the time value of money. It reflects the fact that a sum of money available today is usually worth more than the same nominal amount received in the future, because money held now can be invested to earn interest or another return.[1][2][3]

For example, if £100 is placed in a bank account that pays 5% interest per year and interest is credited once a year, the balance after one year will be £105. For an investor who expects a 5% return and ignores inflation, the future value of the £100 after one year is therefore £105.[4][5]

The concept helps individuals and firms decide whether to spend money now, or to defer spending by saving or investing. Comparing the future value of saving with the utility of current consumption highlights the opportunity cost of using funds immediately. In corporate and investment finance, future values are used together with present value to analyse long term projects and securities such as bonds and annuities.[2][6]

Inflation affects the purchasing power of future cash flows. A calculation that uses a nominal interest rate gives a nominal future value that does not adjust for inflation. For example, if £100 earns a nominal interest rate of 5% over one year, the nominal future value is £105, but if prices rise by about 2% over the same period, the real value of that future amount is closer to £103 in terms of current prices. Analysts often distinguish between nominal and real interest rates and may use real discount rates or inflation adjustments, such as those implied by the Fisher equation.[7][5]

Simple interest

To determine future value (FV) using simple interest (that is, without compounding), the future value of a single amount is given by:

FV=PV(1+rt)

where PV is the present value, r is the simple interest rate per time period in decimal form, and t is the number of time periods.[8]

The simple interest earned over the period is PVrt, so the future value is the sum of the original principal and interest.[8][9][4] For example, if £100 earns simple interest at 5% per year for three years, the future value is FV=100(1+0.05×3)=115, because the total interest is 100×0.05×3=15.

Because interest is applied only to the principal, the future value under simple interest increases in proportion to t, and so is a linear function of time. For a given nominal rate and period, compound interest produces a higher future value as interest is earned on both the principal and previously accrued interest.[10]

Compound interest

To determine the future value using compound interest, the future value FV of a single amount invested at a periodic interest rate is:

FV=PV(1+i)n

where PV is the present value, i is the interest rate per compounding period, and n is the number of compounding periods.[11][5] For a given present value and interest rate, the future value increases as the number of compounding periods increases, and the growth of the investment over time is exponential.[12]

Solving this expression for n gives the number of compounding periods needed for an amount to reach a specified future value. For example, at an interest rate of 5% per year, a lump sum doubles in value when (1+0.05)n=2, which corresponds to a doubling time of a little over fourteen years. Approximate mental rules for doubling time, such as the Rule of 72, use the same relationship between the growth factor and the number of periods.[5][1]

Multiple compounding periods and effective annual rate

If the stated nominal annual interest rate is j and interest is compounded m times per year, the interest rate per compounding period is j/m. When the time to maturity is t years, so that there are n=mt compounding periods, the future value of a present amount can be written as:

FV=PV(1+jm)mt.[1]

For example, if an account pays interest at a nominal rate of 6% per year compounded twice a year, the periodic rate is 3% and there are two compounding periods in a year. The effective annual rate r is then:

(1+0.03)2−1≈0.061[13]

so the investment grows over the year by about 6.1%.

More generally, if a nominal annual rate j is compounded m times per year, the effective annual rate r is:

r=(1+jm)m−1.[13]

Continuous compounding

If interest is compounded continuously at a nominal annual rate j, the effective annual rate is:

r=ej−1

which is the limit of the previous expression as the number of compounding periods per year tends to infinity.[13] For an investment held for t years, the future value of a present amount under continuous compounding is:

FV=PVejt.[1]

Future value of an annuity

Compound interest formulas apply to a series of level payments or deposits. The future value FVannuity at the end of n periods of an ordinary annuity, with payment PMT made at the end of each period and interest rate r per period, is:

FVannuity=PMT(1+r)n−1r.[14][15]

Here r is the interest rate per period, n is the number of payments and PMT is the fixed payment amount. This formula is used to calculate the future value of a stream of equal contributions to a savings or retirement account and to analyse loan repayment schedules.[15]

Applications

Future value calculations are widely used in personal finance to plan for savings goals and retirement. Households use the future value of a single deposit or a series of regular deposits to estimate how much money will be available at a target date in a savings account or retirement plan.[4][5] For example, a family saving towards a house deposit or future education costs may compare different contribution amounts and time horizons by calculating the future value of regular monthly payments.

In banking and consumer credit, lenders and borrowers consider the future value of loan balances and other obligations. For example, a contract may specify a single balloon payment at a future date, or the amount that will be outstanding if the loan is repaid early. These future cash amounts depend on the interest rate and compounding convention stated in the agreement.[1][3]

In corporate and investment finance, future value is used together with present value in discounted cash flow and net present value analysis. Projected cash flows from an investment or a capital project can be discounted to present value or compounded to a common future date in order to compare alternatives.[2][6]

Basic future value calculations usually assume a constant interest or discount rate over time and do not directly incorporate inflation, taxes or uncertainty. In practice, analysts may work with real, term-dependant rates that adjust for inflation, and incorporate risk by using different discount rates or by modelling cash flows under different scenarios.[7][5]

See also

References

  1. ↑ a b c d e Script error: No such module "citation/CS1".
  2. ↑ a b c Script error: No such module "citation/CS1".
  3. ↑ a b Script error: No such module "citation/CS1".
  4. ↑ a b c Script error: No such module "citation/CS1".
  5. ↑ a b c d e f Script error: No such module "citation/CS1".
  6. ↑ a b Script error: No such module "citation/CS1".
  7. ↑ a b Script error: No such module "citation/CS1".
  8. ↑ a b Script error: No such module "citation/CS1".
  9. ↑ Script error: No such module "citation/CS1".
  10. ↑ Script error: No such module "citation/CS1".
  11. ↑ Script error: No such module "citation/CS1".
  12. ↑ Script error: No such module "citation/CS1".
  13. ↑ a b c Script error: No such module "citation/CS1".
  14. ↑ Script error: No such module "citation/CS1".
  15. ↑ a b Script error: No such module "citation/CS1".
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