Future Value (FV)

Lesson

Future value (FV) calculates the value of an investment or cash flow at a specific point in the future, considering the time value of money. The time value of money is the idea that a dollar today is worth more than a future dollar due to its potential earning capacity.

Practice Question #1

What is the future value of a $5,000 investment with an annual interest rate of 6% after 3 years?

A) $5,955.08

B) $6,000.00

C) 5972

D) 5947

Select an option above to see an explanation here.

A) The future value can be calculated using the formula FV = PV * (1 + r)^t, where PV = $5,000, r = 0.06, and t = 3. FV = $5,000 * (1 + 0.06)^3 = $5,955.08. B) This option incorrectly assumes a simple interest calculation. C) This option is incorrect due to an incorrect calculation. D) This option is incorrect due to an incorrect calculation.

Terms

Future Value (FV):: The value of an investment or cash flow at a specific point in the future.

Practice Question #2

Which of the following factors does not affect the future value of an investment?

A) Present value

B) Interest rate

C) Time period

D) Inflation rate

Select an option above to see an explanation here.

A) Present value is the starting point for calculating future value. B) Interest rate determines the rate of return on an investment. C) Time period affects the compounding of interest. D) Inflation rate affects the real value of money but is not directly used in the future value calculation.

Do Not Confuse With

Present Value (PV):: While future value calculates the value of an investment at a specific point in the future, present value calculates the current value of an investment or cash flow.

Practice Question #3

What is the future value of a perpetuity that pays $100 per year with a discount rate of 5%?

A) $2,000

B) 5000

C) 10000

D) Cannot be calculated

Select an option above to see an explanation here.

A) The future value of a perpetuity can be calculated using the formula FV = PV / r, where PV = $100 and r = 0.05. FV = $100 / 0.05 = $2,000. B) This option is incorrect due to an incorrect calculation. C) This option is incorrect due to an incorrect calculation. D) The future value of a perpetuity can be calculated using the formula provided.

Real-World Example

Suppose you invest $1,000 in a savings account with an annual interest rate of 5%. After one year, the future value of your investment would be $1,050, as you would have earned $50 in interest.

Practice Question #4

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Example Series 65 Example Practice Question

Formulas to Remember

FV = PV * (1 + r)^n Where: FV = Future Value PV = Present Value r = Interest rate per period n = Number of periods

Practice Question #5

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Example Series 65 Example Practice Question

Formula Examples

Suppose you invest $1,000 at an annual interest rate of 5% for 3 years. Calculate the future value of the investment. Step 1: Identify the variables PV = $1,000 r = 0.05 (5% as a decimal) n = 3 Step 2: Apply the formula FV = PV * (1 + r)^n FV = $1,000 * (1 + 0.05)^3 FV = $1,000 * (1.05)^3 FV = $1,000 * 1.157625 FV = $1,157.63 The future value of the investment after 3 years is $1,157.63.