What would you prefer – $ 100,000 today or $ 200,000 in ten years? This is where the future value calculator comes in!
Reduction of time-adjusted cash flows to a specific point in time to allow for an objective comparison of the value of money. Some uncertainties jeopardize cash flows, such as adding the risk premium to the interest rate as compensation for uncertainty.
Future Value Calculator
Future Value Calculator is made to help people find the future value of their money without wasting their time and getting lost in calculations. Read on to discover more facts about it and learn how to calculate it. It is worth reading!
Formula: How to Compute Future Value
FV = P * (1 + R) ^ N
- P – Present Value
- R – Rate of Interest
- N – No. of years
Here is an example of its usage:
| Present Value | $1,000 |
| Rate of Interest | 3% |
| No. of years | 5 |
FV = 1,000 * (1 + 0.03) ^ 5FV = 1,000 * 1.03 ^ 5FV = 1,000 * 1.16FV = $1,160
Future and Present Value
Future value is the value of the present monetary amount or series of payments at a future time, which is estimated at a given interest rate. The present value of money is simply the amount you have or will receive today. If you take a million dollars today, the theory assumes that in the absence of other options, you will at least keep that money in the bank.
The term “at least” is included in the assumption because the theory is based on the model of modern and stable markets in which the return obtained by investing in a bank is safe and free of any risks.
At the same time, that yield is always lower than the one you can achieve, for example, by investing on the stock exchange or in some personal project (of course, you will have to take on all the risks of such an investment).
If someone promises to give you a million dollars in two years, you should rightly ask yourself: What does that mean to my practice now? Does that really make you a millionaire today? Well, not really.
The process of calculating the present from the future value is reversed. By applying this theory, periodic cash inflows, equal annuities, and project values can be evaluated. Besides, there are a number of other possibilities.
Time value of the money theory
Have you ever had a late payment that you expect sometimes? If so, this theory provides an answer to how much the money will be reduced in case you don’t get paid on time.
Also, let’s say you’re in the early stages of a startup concept and trying to estimate revenue and expenses over a multi-year period. Let’s assume that project A gives higher inflows early but has a shorter lifespan, while project B will be profitable down the line but with a longer period of profitability. If so, you need to ask yourself the following questions:
- Is this endeavor worth it?
- Is project “A” more valuable than project B?
- Is it worth it to take a loan?
- What is the real value of your obligations to the bank?
The theory of the time value of money is a useful tool for finding answers to all these questions. This article is an introduction to the basic concepts of the theory – current and future value of money – and more advanced tools will be presented in one of the following articles.
An offer you can’t refuse
Let’s say someone offers you a million dollars today with the only condition that you have to decide whether to take the money today or in one year. You have already decided, haven’t you? Of course, this question gives an intuitive answer – you will take the money now, and here’s why.
As far as this example is concerned, no financial theory is necessary to help us make a decision. It is quite clear that we want money now. However, what if you are offered money under the following conditions:
- $ 907,029 today;
- $ 952,381 in one year from today;
- $ 1,000,000 in two years from today.
Of course, your choice will depend on your requirements. Be sure to choose the option that best suits your needs.
What Is (and What Is Not) an Investment When It Comes to Future Value?
Experts in economics know well the difference between these terms. In everyday conversations, these terms are not always used correctly though. For example, buying real estate is often considered an investment. However, when everything is added and subtracted (maintenance, taxes, etc.), it turns out that it is actually a cost.
Investing is a way to increase the money you have. However, earnings are not necessarily the only motive for investing, but they can also be used to preserve the value of what you have already acquired. Saving is also not an investment.
Term savings in a bank can bring some minimal profit while keeping money in a “pallet”. The money saved is a fixed amount. It does not increase. In fact, it can happen that over time, it loses value due to inflation and devaluation of money.
Investing Money in Investment Funds
Mutual funds are a type of group, collective investment in a portfolio designed to track a particular stock index such as the SP 500 (Standard & Poor’s 500 Index) or NASDAQ. For example, the SP 500 stock index allows you to invest in a fund that brings together the 500 largest US companies (Amazon, Facebook, Apple, etc.).
What do you gain and what can you lose?
Instead of investing money in the shares of only one successful company, you are advised to distribute the risk to more parties. Some indicators say that investing brings about 10% of income per year.
It is a great choice for novice investors. There is no big risk and liquidity (the ability to sell the investment and take the invested money) is good because these indices can easily be sold on the stock exchanges.
Inflation grows more or less annually, depending on various factors. The very notion of inflation refers to the growth of prices. Likewise, the inflation rate is an indicator of the percentage in which prices have risen. Higher prices mean a lower value of money at the same time.
Whether it is higher or lower, a certain percentage of inflation certainly exists compared to the previous year. In other words, keeping money is not worth it because its value decreases annually and you will be able to buy fewer goods or services for the same amount of money when prices rise.