Future Value (FV) in finance is a measure of an investment's worth at a future date, considering a specific rate of return. It's based on the time value of money principle, emphasizing that money today has greater potential earning capacity than money tomorrow. The concept is crucial for financial planning, investment decisions, and evaluating financial projects. Calculating FV involves understanding the effects of compounding interest over time, whether for lump sums or annuities, and is pivotal for achieving long-term financial goals.
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Future Value is the quantification of the value of an investment or cash flow at a specified future time, based on the time value of money and compounding
Formula
The Future Value of an investment is calculated using the formula FV = PV * (1 + r)^n, where PV is the initial investment, r is the interest rate, and n is the number of compounding periods
Impact of Compounding
Compounding plays a crucial role in the growth of investments and is reflected in the Future Value calculation
Future Value is used in financial planning, investment decisions, and assessing the viability of financial projects
The time value of money recognizes that a dollar today is worth more than a dollar tomorrow due to its potential earning capacity
Money can earn income over time, increasing its present value
Compounding allows earnings to accumulate and generate further earnings, amplifying the impact of the time value of money
The Future Value of a lump sum investment is calculated using the Future Value formula, taking into account the compound interest earned over the investment duration
The Future Value of a lump sum is used in decision-making for savings, loans, annuities, and retirement planning
The Future Value of an annuity is the accumulated value of a series of regular payments at a future date, calculated using a formula that considers the timing of payments and the compounding effect
Ordinary Annuity
An ordinary annuity involves payments at the end of each period, and its Future Value is calculated using the formula FV = P * [(1 + r)^n - 1]/r, where P is the periodic payment amount
Annuity Due
An annuity due involves payments at the beginning of each period, and its Future Value is calculated by multiplying the ordinary annuity's Future Value by (1 + r) to account for the additional compounding period for each payment
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Definition of Future Value (FV)
FV is the estimated value of a current asset or amount of money at a future date, calculated using a projected rate of return.
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Time Value of Money Principle
This principle states that money available now is worth more than the same amount in the future due to its potential earning capacity.
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The ______ ______ of money is a key principle in finance that underpins the concept of Future Value.
time value
