Future value tells you how much money you could have in the future if you invested a certain amount of money today with a certain interest rate. This can be easily calculated in Excel, and we will show you how.
The simple version:
Image you have $100,000 and you want to invest them in a bank for six years with an annual interest rate of 3 percent. How much money will you have in six years from now?
The image shows what your calculation will look like.
The equation for that is:
FV = PV * (1+i)n
n is the number of period units, in our case — years.
i is the rate of return (interest rate), it is expressed in numbers like 0.03 or 0.04.
FV is future value
PV is present value
Microsoft Excel calculation:
In Excel there is a function for calculation future value, which is more complex because it describes a more complex situation.
It is assumed here that each period you invest a constant sum of payment, and each period you receive an interest based on the all money invested thus far.
Here is the formula Excel uses for calculating the future value.
- Rate– Interest rate per period.
- Nper– Total number of payment periods.
- Pmt– Payment made each period; it cannot change during the life of the annuity.
- Pv– Present value of your investment. If Pv is omitted, it is assumed to be 0 (zero), and you must include the Pmt argument.
- Type– Optional. It can be number 0 or 1, and indicates when payments are due. 0 means at the end of a period, and 1 means at the beginning of a period.
So, for example, let’s say that your initial investment is 300 dollars, and that each year in the next six years you invest 1,000 dollars. You’ll also receive an interest every year, which is being invested as well. The interest rate is 3%, and payments are due at the beginning of the period.
How much money will you have earned after six years?
The answer is $7,020. See if you get the same result.
