To calculate the Future Value:
\[ \text{V} = \text{PV} \times (1 + r)^n \]
Where:
The future value in finance refers to the projected worth of an investment or asset at a specific point. It is a critical concept used to understand the potential growth or value of an investment over time. By calculating the future value, investors can assess the profitability of an investment, make informed financial decisions, and plan for their future financial needs.
Future value is determined by considering the initial amount invested, the rate of return, and the period over which the investment is held. The future value calculation considers the compounding effect, which means that the return on investment is reinvested over time, earning additional returns.
The significance of future value lies in its ability to help individuals and businesses make informed financial decisions. By calculating the future value of an investment, investors can evaluate the potential returns and compare different investment options. This allows them to choose investments that align with their financial goals, risk tolerance, and time horizon.
For businesses, understanding future value assists in capital budgeting decisions. It enables them to assess the profitability of long-term investments, such as purchasing new equipment or expanding production facilities. By estimating the future value, businesses can determine the viability and potential return on investment of such projects.
Let's assume the following values:
Step 1: Calculate the future value:
\[ \text{V} = 1000 \times (1 + 0.05)^{10} = 1000 \times 1.62889 = 1628.89 \]
So, the Future Value is 1628.89.
Let's assume the following values:
Step 1: Calculate the future value:
\[ \text{V} = 5000 \times (1 + 0.07)^{5} = 5000 \times 1.40255 = 7012.75 \]
So, the Future Value is 7012.75.
