Future Value

Published Dec 30, 2022

Definition of Future Value

Future value (FV) is the value of a financial asset at a specific point in the future based on an assumed rate of return. That means it is the amount of money that a current investment will be worth at a specific point in the future, assuming a certain rate of return.

Example

To illustrate this, let’s say you invest USD 10,000 in a savings account that pays an annual interest rate of 5%. In this case, the future value of your investment after one year would be USD 10,500 (i.e., USD 10,000 x 1.05).

Similarly, if you invest USD 10,000 in a stock that pays an annual dividend of 6%, the total value of your investment after one year would be USD 10,500 (i.e., USD 10,000 x 1.06). That is assuming the value of the underlying stock remains the same, of course.

Why Future Value Matters

Future value is an important concept in finance and financial economics, as it helps investors to determine the potential return on their investments and thereby whether the investment is worth their money or not. It can also be used to calculate the present value of an investment, which is the amount of money an investor needs to invest today in order to achieve a certain value in the future.
In addition to that, the future value is also used to calculate the net present value (NPV) of an investment, which is the difference between the present value of the cash inflows and the present value of the cash outflows. This is an important concept for businesses, as it helps them to decide whether or not to invest in a certain project.