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

  • Calculating Values for Fractional Time Periods

    • That means that the point in the future is also a point where interest accrues.
    • If the problem asks you to find the value at June 1, 2014, there is a bit of a conundrum.
    • The question could ask for the future value, present value, etc., or it could ask for the future balance, which have different answers.
    • If the problem asks for the future value (FV) or present value (PV), it doesn't really matter that you are dealing with a fractional time period.
    • Calculate the future and present value of an account when a fraction of a compounding period has passed

  • Discounted Cash Flow Approach

    • The discounted cash flow approach finds the value of an asset using its expected return and the present values of future cash flows.
    • -- To find the discounted present value of an asset, it is necessary to sum the discounted present value of each future cash flow (FV) at any time period (t) in years from the present time, using the appropriate interest rate (i).
    • This interest rate is commonly referred to as the "discount rate" when discounting values from the future to the present.
    • The terminal value is the present value, at a future point in time, of all cash flows taking place after the projection period.
    • -- Use this equation to find the present value of a future terminal value.

  • 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.

  • Pricing a Security

    • This method estimates the value of an asset based on its expected future cash flows, which are discounted to the present.
    • This concept of discounting future money is commonly known as the time value of money.
    • Therefore, money you get in the future needs to be reduced to approximate the opportunity cost.
    • Then one makes a calculation to compute the present value of the future cash flows.
    • Typically there will be people who are either optimistic about the company--because they anticipate that it will be worth more in the future than it is in the present--or pessimistic--because they think it will do worse in the future.

  • 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.

  • Sunk Costs

    • In traditional microeconomic theory, only prospective (future) costs are relevant to an investment decision.
    • Once spent, such costs are sunk and should have no effect on future pricing decisions.
    • The economic loss is the difference between these values (including transaction costs).
    • The sum originally paid should not affect any rational future decision-making about the car, regardless of the resale value.
    • If the owner can derive more value from selling the car than not selling it, then it should be sold, regardless of the price paid.