Future value

The future value1 is an anticipated gain or decline of today’s value predicted by equation 2.

VN = V0 (1+R)N

Equation 2

Equation 2 states that an initial value (V0) will increase or decline to some future value (VN) depending on the growth factor (1+R)N.  The growth factor is determined by an assigned rate of return (R ) and an assigned exponent N (N is number of time periods).  The rate of return can be converted to a percentage value by the factor 100.  For example, R = 0.3 is converted to R = 30% by the product 0.3*100.  An increase is expected when R is a positive value and a decline is expected when R is a negative value.

Copyright © 2011 Douglas R Knight

References

1.  A.A. Groppelli and Ehsan Nikbakht.  Chapter 3, the value of money over time, Finance, 5th Edition.  Barron’s, New York, 2006.

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