Definition of Future Value

Future value is the incremental value of the present value of an asset at a constant growth rate. This growth rate applies to the principal value in the case of the simple interest method. In the case of the compound interest method, the interest is applied on (principal + interest).

For simple interest the future value is calculated as follows:

Future Value = Present Value + (Present value x Interest Rate x number of years)

For compound interest rate the future value is calculated as follows:

Future Value = Present Value x (1+ interest rate)^n

Example of Future value (compound interest rate):

To understand the future value better just think of cash deposited into a bank that pays an interest of 10% per year. So if you deposit \$5000 in bank today for 5 years, after five years the future value using simple interest and compound interest will be as follows:

FV using Simple Interest = \$5000 + (\$5000 x 10% x 5) = \$7500

FV using Compound Interest = \$5000 x (1+10%)^5 = \$8052.55