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?Â 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.Â This is because with compounding, each yearâ€™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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