Future value (FV) is the value of a current asset at some point in the future based on an assumed growth

rate.

Types of Future Value

Future Value Using Simple Annual Interest

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:

FV = I x (1+(r x t)

Where:

I = Investment Amount

R = Interest Rate

T = Number of years

For example, assume a $1,000 investment is held for five years in a savings account with 10% simple
interest paid annually. In this case, the FV of the $1,000 initial investment is $1,000 * [1 + (0.10 * 5)], or
$1,500.

Future Value Using Compounded Annual Interest

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. In the example
above, the first year of investment earns 10% * $1,000, or $100, in interest. The following year,
however, the account total is $1,100 rather than $1,000; so, to calculate compounded interest, the 10%
interest rate is applied to the full balance for second-year interest earnings of 10% * $1,100, or $110.

The formula for the Future Value (FV) of an investment earning compounding interest is:

FV = I x (1 x r) ^ t

where:

I = Investment Amount

R = Interest Rate
T = Number of years

Using the above example, the same $1,000 invested for five years in a savings account with a 10%
compounding interest rate would have an FV of $1,000 * [(1 + 0.10)5], or $1,610.51.

Present value is the concept that states an amount of money today is worth more than that same
amount in the future. In other words, money received in the future is not worth as much as an equal
amount received today.

Example of Present Value

Let's say you have the choice of being paid $2,000 today or $2,200 one year from now. You also have
the option of investing the $2,000 that'll earn a 3% rate of return over the next year. Which is the best
option?

Using the present value formula, the calculation is $2,200 (FV) / (1 +. 03)^1.

PV = $2,135.92, or the minimum amount that you would need to be paid today to have $2,200 one year
from now. In other words, if you were paid $2,000 today and based on a 3% interest rate, the amount
would not be enough to give you $2,200 one year from now.

Of course, the present value calculation includes the assumption that you could earn 3% on the $2,000
over the next year. If the interest rate was much higher, it might make more sense to take the $2,000
today and invest the funds because it would yield a greater amount than $2,200 one year from now.

Amortized Loan - How to Calculate Loan Amortization using Present Value Interest Factor

An amortized loan is one that is paid off in equal periodic instalments or payments and includes varying
portions of principal & interest during its term. Examples of amortizable loans include auto loans,
mortgages, business loans & others. How do you compute the periodic payments on an amortized loan?

The formula is:

A = P/ PVIF
Where:

A = amount of loan

P = principal amount

Pvif = present value interest factor

How to calculate the amount of loan:

1) Divide the principal loan amount (A) b PVIFA, which is a factor shown in the Present Value Interest

Factor of Annuity of $1 table, and use this formula

Amount of loan = A = (P / PVIFA)

Example:

Consider a firm borrows $5,000 to be repaid in five equal instalments at the end of each of the next five
years. The discount rate on this loan payable is 10%. What is the amount of each instalment payment?

P = $5,000

PVIFA (10%, 5 years) = 3.791 (using the present value interest factor of $1 annuity table)

Amount of loan = A = (P / PVIFA)

Amount of loan = A = $5,000 / 3.791

Amount of loan = A = $1318.91

Once the monthly loan instalment is computed, a loan amortization schedule can be created and each
loan payment consists partly of interest & principal. The interest portion of the payment is usually the
largest during the first few periods because the loan amount is highest at that point in time. However, as
instalments are made and the loan balance decreases, the interest payments become lower as the
interest rate is updated with the ending balance of the loan amount. Confused? We derive an example
below:

Year

Payment (B)

Interest (C)

Repayment of Principal

(D) = (B) – (C) **

Ending Balance (E)

0 $5,000.00

1 $1,318.91 $500.00 * $818.91 $3,681.09

2 $1,318.91 $368.11 $950.80 $2,362.18

3 $1,318.91 $236.22 $1,082.69 $1,043.27

4 $1,318.91 $104.33 $1,214.58 -$275.64

5 $1,318.91 -$27.56 $1,346.47

* Note the interest in Year 1 is calculated by multiplying the ending balance, $5000 by 10% which totals
$500. In year 2, interest is calculated by multiplying the ending balance $3,681.09 by 10% which is
$368.11.

Calculating the period of an investment (EMCFX)

For calculations using the simple interest formula, we solve for n, the time period of an investment or
loan, by simply rearranging the formula to make n the subject. For compound interest calculations,
where n is an exponent in the formula, we need to use our knowledge of logarithms to determine the
value of n.
A=P(1+i)n

=accumulated amount=principal amount=interest rate written as a decimal=time period

Solving for n:

A/P

Use definition: n

Change of base: n

=P(1+i)n=(1+i)n=log(1+i)(AP)=log(AP)log(1+i)

WORKED EXAMPLE 1: DETERMINING THE VALUE OF n

Thembile invests R3 500 into a savings account which pays 7,5% per annum compounded yearly. After
an unknown period of time his account is worth R4 044,69. For how long did Thembile invest his money?

Solution

Write down the compound interest formula and the known values

A=P(1+i)n

APi=4 044,69=3 500=0,075

Substitute the values and solve for n

4 044,69

4 044,69/3 500

∴n
=P(1+i)n=3 500(1+0,075)n=1,075n=log(1,075)(4 044,693 500)=log4 044,693 500log1,075=2,00…

Write final answer

The R3 500 was invested for 2 years.

WORKED EXAMPLE 2: DURATION OF INVESTMENTS

Margo has R12 000 to invest and needs the money to grow to at least R30 000 to pay for her daughter's
studies. If it is invested at a compound interest rate of 9% per annum, determine how long (in full years)
her money must be invested?

Solution

Write down the compound interest formula and the known values

A=P(1+i)n

=30 000=12 000=0,09

Substitute the values and solve for n

30 000

52

∴n

=P(1+i)n=12 000(1+0,09)n=(1,09)n=log1,09(52)(use definition)=log52log1,09(change of base)=10,632…

Write the final answer

In this case we round up, because 10 years will not yet deliver the required R30 000. Therefore the
money must be invested for at least 11 years.