Future Value

(noun)

The value of an asset at a specific date. It measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future, assuming a certain interest rate, or more generally, rate of return, it is the present value multiplied by the accumulation function.

Related Terms

Examples of Future Value in the following topics:

  • Future Value of Annuity

    • The future value of an annuity is the sum of the future values of all of the payments in the annuity.
    • The future value of an annuity is the sum of the future values of all of the payments in the annuity.
    • Provided you know m, r, n, and t, therefore, you can find the future value (FV) of an annuity.

  • The Relationship Between Present and Future Value

    • Present value (PV) and future value (FV) measure how much the value of money has changed over time.
    • The future value (FV) measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future assuming a certain interest rate, or more generally, rate of return.
    • The value does not include corrections for inflation or other factors that affect the true value of money in the future.
    • On the other hand, the present value (PV) is the value on a given date of a payment or series of payments made at other times.
    • If there are multiple payments, the PV is the sum of the present values of each payment and the FV is the sum of the future values of each payment.

  • Future Value, Multiple Flows

    • Finding the future value (FV) of multiple cash flows means that there are more than one payment/investment, and a business wants to find the total FV at a certain point in time.
    • These payments can have varying sizes, occur at varying times, and earn varying interest rates, but they all have a certain value at a specific time in the future.
    • The first step in finding the FV of multiple cash flows is to define when the future is.
    • Then, simply add all of the future values together.
    • The FV of multiple cash flows is the sum of the future values of each cash flow.

  • Calculating Future Value

    • The Future Value can be calculated by knowing the present value, interest rate, and number of periods, and plugging them into an equation.
    • When calculating a future value (FV), you are calculating how much a given amount of money today will be worth some time in the future.
    • In order to calculate the FV, the other three variables (present value, interest rate, and number of periods) must be known.
    • Suppose we want to again find the future value of a $500, 10-year loan, but with an interest rate of 1% per month.
    • Distinguish between calculating future value with simple interest and with compound interest

  • Dollar-Value LIFO

    • Managers apply the concepts of interest, future value, and present value in making business decisions.
    • The concept of the time value of money stems from the logical reference for a dollar today rather than a dollar at any future date.
    • That is, the dollars held now must be accumulated or rolled forward, or future dollars must be discounted or brought back to the present dollar value, before comparisons are valid.
    • Such comparisons involve future value and present value concepts.
    • The future value or worth of any investment is the amount to which a sum of money invested today grows during a stated period of time at a specified interest rate.

  • Present Value and the Time Value of Money

    • The time value of money is the principle that a certain amount of money today has a different buying power (value) than in the future.
    • The time value of money is the principle that a certain amount of money today has a different buying power (value) than the same currency amount of money in the future.
    • The value of money at a future point of time would take account of interest earned or inflation accrued over a given period of time.
    • Time value of money: (1 + r)t x (the value of the initial investment) = future value; where r is the annual interest rate and t is the number of years.
    • Present value: (the value of the investment at a future time)/(1 + r)n; where r is the annual interest rate and n is the number of years the investment has occurred.

  • Discounted Cash Flow Approach

    • The discounted cash flow formula focuses on determining the relative time value of money of each projected cash flow (i.e. monthly, quarterly, annually, etc.), bringing each forecast of future value into present value terms.
    • Just as in an NPV analysis, the ultimate end product will be the value of future profits (or losses) in today's terms.
    • DPV - The discounted present value of the future cash flow (FV), or FV adjusted to compensate for the units of time in the future it will be received.
    • FV - The nominal value of a cash flow amount in a future period (i.e. the amount of the cash flow prior to taking time value of money into account).
    • Translate future projected cash flows into present day dollars, incorporating risk and the time value of money

  • Other Considerations in Capital Budgeting

    • The real option creates economic value by generating future decision rights for management.
    • In an uncertain environment, having the flexibility to decide what to do after some of that uncertainty is resolved has value.
    • A key feature is that the real option creates economic value by generating future decision rights - specifically, by offering management the flexibility to act upon new information such that the upside economic potential is retained while the downside losses are contained .
    • Another value-creating aspect of real options can be found in abandonment.
    • Such future discretionary investment opportunities are known as growth options.

  • Commodities and Other Futures

    • Commodity "futures" are contracts to buy or sell certain certain goods at set prices at a predetermined time in the future.
    • Futures traditionally have been linked to commodities such as wheat, livestock, copper, and gold, but in recent years growing amounts of futures also have been tied to foreign currencies or other financial assets as well.
    • They are lured to commodity trading by the prospect of making huge profits on small margins (futures contracts, like many stocks, are traded on margin, typically as low as 10 to 20 percent on the value of the contract).
    • Speculating in commodity futures is not for people who are averse to risk.
    • While professional traders who are well versed in the futures market are most likely to gain in futures trading, it is estimated that as many as 90 percent of small futures traders lose money in this volatile market.

  • Futures and Forward Contracts

    • However, futures differ from forwards.
    • If investors and savers believe that oil will be $90 per barrel, then the market value of your futures contract rises.
    • If investors and savers believe the price of oil will be $70 per barrel, then the market value of your futures contract drops.
    • Speculators buy derivatives because the market value of the derivatives could experience wide swings.
    • On the day of delivery, the market value of a derivative must equal the spot price.