Future value
Future value (also known by its acronym, FV, as well as FVN) is the future value of an initial single cash flow, where N is the number of periods the initial cash flow is compounded.
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Future value (FV, FVN). The future value of an initial single cash flow, where N is the number of periods the initial cash flow is compounded.
According to Fundamentals of Financial Management by Eugene F. Brigham and Joel F. Houston (15th edition),
- Future value. The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate.
Related concepts
- PV. Present value, or beginning amount. For example, US$100 initially invested in a bond.
- FVn. Future value, or ending amount, of the account after N periods. Whereas PV is the value now, or the present value, FVN is the value N periods into the future, after the interest earned has been added to the account.
CFt 5 Cash flow. Cash flows can be positive or negative. The cash flow for a particular period is often given as a subscript, CFt, where t is the period. Thus, CF0 5 PV 5 the cash flow at Time 0, whereas CF3 is the cash flow at the end of Period 3. I 5 Interest rate earned per year. Sometimes a lowercase i is used. Interest earned is based on the balance at the beginning of each year, and we assume that it is paid at the end of the year. Here I 5 5% or, expressed as a decimal, 0.05. Throughout this chapter, we designate the interest rate as I because that symbol (or I/YR, for interest rate per year) is used on most financial calculators. Note, though, that in later chapters, we use the symbol r to denote rates because r (for rate of return) is used more often in the finance literature. Note too that in this chapter we generally assume that interest payments are guaranteed by the U.S. government; hence, they are certain. In later chapters, we consider risky investments, where the interest rate earned might differ from its expected level. INT 5 Dollars of interest earned during the year 5 Beginning amount 3 I. In our example, INT 5 $100(0.05) 5 $5. N 5 Number of periods involved in the analysis. In our example, N 5 3. Sometimes the number of periods is designated with a lowercase n, so both N and n indicate the number of periods involved.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
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