What is future value?

Future Value can be understood from the concept of time value of money. 

What is time value of money?

- Receiving $1 today is worth more than $1 in the future

- The opportunity cost of $1 in the future is the interest we could have earned on $1 if received earlier

Future value example:

Example 1: 

You invest $100 in a savings account that earns 10% interest per annum (compounded) for three years.

  After one year:    $100 × (1+0.1) = $110

  After two years:   $100 × (1+0.1)(1+0.1) = $121

  After three years: $100 × (1+0.1)(1+0.1)(1+ 0.1) = $133.10

For one period:

FV₁ = PV ( 1 + r ) = PV ( 1 + r ) ¹

For two periods:

FV₂ = PV ( 1 + r ) ( 1 + r )  = PV ( 1 + r ) ²

For n periods:

FV_n = PV ( 1 + r ) ⁿ 

The expression (1 + r)ⁿ is the future value interest factor (FVIF).  

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