Present value and future value - Learn more about this useful topic by definitions and example
Knowing the present value and future value of a certain amount or investment can help us know the amount we must save to have sufficient capital in our retirement or the money we must save to apply for a mortgage loan.
In this post i will answer the following questions: What is the present value? What is future value? What are the formulas for calculating the present value and future value of a given quantity?
What is present value and future value?
The present value of an investment is when we calculate the present value that will have a certain amount that we will receive or will pay in the future, in the agreed period. The future value is the value reached by a certain capital at the end of the given period.
"A dollar today is worth more than a dollar tomorrow"
Present value and future value: equations
In this section we will learn how we can calculate and know the formulas of the present value and future value of a quantity or investment
How can I calculate the present value of a certain amount?
In order to calculate the present value that will have an investment on a certain date, we must know the following information:
VA = Present value
VF = Future Value
i = Interest rate
n = term of the investment
The equation for calculating the present value of an investment is as follows:
How can I calculate the future value of a given quantity?
In order to calculate and know the future value or final amount that will have an investment on a certain date, we must know the following information in order to perform the calculations.
M = amount we plan to invest to achieve our objectives
i = interest we will get for each period we are going to invest our money
N = Number of periods that our money will be invested (monthly, annual ...)
VF = Future Value
The equation for calculating the future value of an investment is as follows
Present value and future value: Example
If we have an amount of $ 10,000, an interest of 10% and the investment period is 1 year, we must apply the future value formula as follows:
Future Value = 10,000 (1 + 0.10) 1 = 10,000 (1.10) 1 VF = 11.000
Therefore, our future value of investing 10,000 pesos during a year is 11,000 pesos.
Now if we want to calculate the present value of a capital of $ 1,000 within a year, we must apply the following formula:
Actual Value = 10,000 / (1 + 0.10) ^ 1 = 10,000 / (1.10) 1 VP = 9090.09
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I use a HP 12c. It also calculates IRR (internal rates of returns. I bought it about 20 years ago. Now I found an app so now I have it on my phone. It saved me many hours of calculations. I appreciate your post explaining the math behind it. Good post.
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