FREE online courses on Investment Appraisal - Basic Concepts of Investment Appraisal - Future Value

 

If we are getting a return of 10 % in one year what is the return we are going to get in two years? 20 %, right. What about the return on 10 % that you are going to get at the end of one year? If we also take that into consideration the interest that we get on this 10 % then we get a return of 10 + 1 = 11 % in the second year making for a total return of 21 %. This is the same as the compound value calculations that you must have learned earlier.

 

Future Value = (Investment or Present Value) * (1 + Interest) no. of time periods.

 

The compound values can be calculated on a yearly basis, or on a half-yearly basis, or on a monthly basis or on continuous basis or on any other basis you may so desire. This is because the formula takes into consideration a specific time period and the interest rate for that time period only.

 

To calculate these values would be very tedious and would require scientific calculators. To ease our jobs there are tables developed which can take care of the interest factor calculations so that our formulas can be written as:

Future Value = (Investment or Present Value) * (Future Value Interest Factor_n,i)

where n = no of time periods and i = is the interest rate.