Future Value

The future value is nothing but the calculation of the value of asset or cash at a futuristic date whose current value is given. The rate at which it appreciates is known as rate of return.  The current value is accumulated with accumulation function to get the future value. In this method the inflation change are not considered. There are two type of accumulation of which the first one is simple annual interest whereas the second one is annual compound interest.  

The formula for the calculation of the two accumulation function is given below,

Simple annual interest= Original Investment x (1+ (interest rate*number of years))

Annual compound interest= Original Investment x ((1+interest rate) ^number of years)

The need for the future value calculation arise as the value of money is never constant, it keeps on fluctuating. The value of 100 ` now is not the same some 50 years back. In simple terms 5 years back 25 chocolates can be bought with 100 ` whereas now only 20 chocolates can be bought with 100 `. The value of 100 ` depreciate in the above example. The reverse can also take place i.e. appreciation of money. It is therefore necessary to make investment having taken the above facts into consideration. It is important therefore to never keep the money idle, because idle money will not appreciate on its own. The calculation of the future value thus becomes very important factor. It is usually assumed that money value depreciate, hence in most of the case compounding and simple interest in done. In certain situation appreciation of money take place, in those condition the money is discounted.  

The investor calculates the future value of the return that he/she gets from the investment and compares it with the money that he/she thinks is needed to lead a life of his/her liking, if the first value is more then the investor will go ahead with investment else will look in for other new investments. Thus future value calculation plays a important role in identifying the return rate that a investor must try to attain in the future which in turn helps the investor in selecting the investment mode.