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. Future value is calculated in one of two ways depending on whether or not the calculation uses simple or compound interest.
For simple interest the formula is:
Future Value = Current Value x (1 + (interest rate x number of years)
With an investment worth $100 and a 7% interest rate, what will the future value be in 10 years? Using the formula, the answer is:
100 * (1+ (.07 x 10) = $170
The compounding future interest formula is:
Future Value = Current Value x ((1 + interest rate) ^ number of years))
Using the same $100 and 7% interest rate, but compounding annually this time, the future value is:
100 * ((1+.07)^10)) = $196.72
The compounding formula always generates a higher amount than the simple interest calculation. This is because with compounding, each year’s earned interest is added to the original amount, and thus increases the amount against which interest is calculated in subsequent years.
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