Future Value (FV)
Future Value is mainly the same as present value but in reverse mode. The primary concept is the same except ascertaining what something is worth today, the significant thing is to find out out how much something is worth in the future.
Like in the present value give-and-take investor can employ tables to find out a future value factor. These are referred as FVIF(r,n). Therefore
FV= PV * (FVIF(r,n))
If r=10% and n=3, then
= $1,000 * 1.331 = $1,331
We also have annuities while computing future values and often employed in retirement planning. For instance :
If a person has invested $1000 a year for three years, then
FV= CF * (FVAF(r,n))
= $1000 * 3.3100
= $3,310.00
The future values for single payments at 10% for 1 and 2 years these plus the last payment of $1000 sum to $3310.The first payment comes about at the end of year one and brings in interest for two years ($1210). The second cash flow comes about at the end of the second year and gains interest for 1 year ($1100). The third cash flow goes on at the end of the third year and thus yields no interest ($1000).
While planning retirement the investor must compute for inflation too. In general the nominal rate of interest is employed. In spite of the fact that investor may have a million dollars in the future, that money will be valued less than a million dollars today. To demonstrate, the effects of inflation take a $1 in 1940, which is now only 8.5 cents .
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