
Quantitative Methods of Evaluating Businesses and Investments  Time Value of Money
In addition to being able to understand the financial statement, IAs must also have the ability to estimate the value of an investment in the future.
Future Value
When planning investment strategy, it's useful to be able to predict what an investment is likely to be worth in the future, taking the impact of compound interest into account. This formula allows you (or your calculator) to do just that:
P_{n} = P_{0}(1+r)^{n}P_{n}is future value of P_{0}P_{0} is original amount invested r is the rate of interest n is the number of compounding periods (years, months, etc.) 
Note in the example below that when you increase the frequency of compounding, you also increase the future value of your investment.
P_{0} = $10,000
P_{n }is the future value of P_{0} n = 10 years
r = 9%
Example 1 If interest is compounded annually, the future value (P_{n}) is $23,674.
P_{n} = $10,000(1 + .09)^{10} = $23,674
Example 2  If interest is compounded monthly, the future value (P_{n}) is $24,514.
P_{n} = $10,000(1 + .09/12)^{120} = $24,514
Present Value
As part of your investment planning, you might also need to calculate the present value of investments. For example, if your clients want to retire with $1 million in their investment accounts, it would be useful to know how much they need to save each year to reach that goal.
You can simply reverse the future value formula like this:
P_{0 = }P_{n } (1+ r)^{ n} P_{n }= $23,674 P_{0} is the present value of P_{n}n = 10 years r = 9% 
Example: How much would somebody need to invest now if they wish to have $23,674 10 years from now based on a return of 9% compounded annually?
P_{0 }= $23,674 = $10,000
(1+ .09)^{ 10}
Exam Tips and Tricks A typical time value of money question will look something like this: 
 Internal rate of return
 Present value
 Expected return
 Future value
Rates of Return  Internal Rate of ReturnThe correct answer is "d"  the ending value of the investment is known as the future value.
P_{n }= $10,000(1+.06/12)^{120 }= $18,194
Related Articles

Fundamental Analysis
Calculating Future Value
Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. 
Investing Basics
Learn Simple And Compound Interest
Interest is defined as the cost of borrowing money, and depending on how it is calculated, can be classified as simple interest or compound interest. 
Bonds & Fixed Income
Accelerating Returns With Continuous Compounding
Investopedia explains the natural log and exponential functions used to calculate this value. 
Investing
The Effective Annual Interest Rate
The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding. 
Forex Education
Time Value Of Money: Determining Your Future Worth
Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation. 
Investing
How does Compound Interest Work?
A quick way to understand the impact of compound interest is to ask yourself if youâ€™d rather receive $100,000 a day for a month, or start with a penny on day one and double it every day for those ... 
Fundamental Analysis
How To Calculate Your Investment Return
How much are your investments actually returning? Find out why the method of calculation matters. 
Fundamental Analysis
What is Present Value?
Present value tells us how much a future sum of money is worth today, given a specified rate of return. This is an important financial concept based on the principle that money received in the ... 
Options & Futures
StockPicking Strategies: Value Investing
Value investing is one of the best known stockpicking methods. In the 1930s, Benjamin Graham and David Dodd, finance professors at Columbia University, laid out what many consider to be the ... 
Savings
Teaching Financial Literacy To Tweens: Earning And Paying Interest
The concepts of interest, compounding and the time value of money can be a tricky concept for kids to understand, but the lessons are worth it.
RELATED TERMS

Effective Annual Interest Rate
Effective Annual Interest Rate is an investment's annual rate ... 
Biotech Compound
A chemical entity that forms the starting point in the drug development ... 
Compound
The ability of an asset to generate earnings, which are then ... 
Continuous Compounding
The process of earning interest on top of interest. The interest ... 
Stated Annual Interest Rate
The return on an investment that is expressed as a peryear percentage, ... 
Embedded Value
A common valuation measure used outside North America, particularly ...
RELATED FAQS

How do mutual funds compound interest?
Learn how mutual funds can grow wealth over time through the magic of compound interest by reinvesting dividends back into ... Read Answer >> 
How do I use the rule of 72 to calculate continuous compounding?
Find out why the rule of 72 does not accurately reflect the growth caused by continuous compounding, and which number can ... Read Answer >> 
How do investors calculate the present value of a future investment?
Learn what present value is, how to calculate the present value of a future investment, and what formula investors use to ... Read Answer >> 
Other than my savings account, what other types of holdings compound my interest?
Understand the benefits of compounding interest, and learn the types of investments that offer compounding in addition to ... Read Answer >> 
How often is interest compounded?
Understand what compound interest is and how the compounding of interest applies to the benefit of investors or creditors, ... Read Answer >> 
How do I adjust the rule of 72 for higher accuracy?
Read about the Rule of 72, why it is only an approximation, and how the Rule of 69.3 can be substituted in for more accurate ... Read Answer >>