The future value of a single sum is a useful formula in business and individual finances. Its main purpose is to discover the value of an investment over a given time period. For example, an individual may want to invest some extra cash. Upon a review of interest rates associated with a number of investments, the individual can compute the potential future value of a single sum placed into the investment. The principle components for this process are present value, number of time periods, interest rate, and the future value of the investment.
Using the components listed above, the formula for future value (FV) is present value (PV) times one plus the investment interest rate (i) raised to the n number of time periods. A mathematical representation of this formula is FV = PV(1 + i)n, with n changing to represent the different years or months in which the investment lasts. This is perhaps the most popular formula for the future value of a single sum, though some alterations may exist depending on investments or the need for investment measurement. Additionally, several types of calculators can compute future value without the use of writing out this formula. The use of a calculator allows for quicker solutions for determining the future value of a single sum.
To use this formula, imagine an investment requires $1,000 US Dollars (USD), has a six percent interest rate, and is good for one year. All of these pieces go into the formula above. The mathematical representation is FV = 1,000(1 + .06)1; the future value of a single sum with these components is $1,060 USD. In short, basic investment decisions with these numbers are simple to compute and may even be completed without the use of the formula or a calculator. Changing the n time periods to 5, however, leads to a future value of $1,338 USD.
Armed with this information, there is almost no end to the types of investments in which an individual or business can apply this formula. For example, individuals and businesses can review savings accounts, money markets, bonds, annuities, and many other investment types. The future value of a single sum is often part of a company’s corporate finance department, where an individual reviews the use of investment capital. A review of several different types — along with the risk involved with each one — often drives the choice of an investment type.
