The Future Value formula works with annuities. Annuities are a series of equal cash outlays at specific intervals such as monthly, quarterly, or annually. The FV (Future Value) returns the future value of a current investment based on deposits and interest that remain constant.

The Syntax for the FV (Future Value) function is:

`FV(rate,nper,pmt,[pv],[type])`

Argument | Description |
---|---|

Rate | The interest amount for the investment |

Nper | The total number of deposits |

Pmt | The payment (the amount of the deposit) |

PV | Optional - The present value, or the lump-sum amount that a series of future payments is worth right now |

Type | Optional - The type is omitted or set to 0 if the payments are made at the end of the period. The type should be set to 1 if the payments are made at the beginning of the period. |

If you invest one dollar today at 10% interest by next year it will have a value of $1.10. The $1.10 is the future value of your money. The interest

The future value is computed using compound interest. The interest is compounded each period. Compound interest means that the interest is not only calculated on the amount deposited but also includes interest on the accumulated interest.

If you deposit one dollar at the rate of 10% compounded annually, at the end of three years that dollar will not have a value of $1.30 but rather a value of $1.33. The extra 3 cents comes from compounding the interest.

If we look at P as the Pmt, r as the interest rate and y as the number of years; the value of the dollar with compound interest can be computed as:

P(1 + r)^{y}

1(1 + .10)^{3} = 1.33

Let’s look at a Future Value example. You want to know how much money you will have at the end of three years if you invest one dollar at the end of each year for three years at 10% interest. Thanks to compound interest the value of your investment at the end of three years would be $3.31.

The
Excel Future Value formula to compute this would be **
=FV(10%,3,1)**

Year 1 | Year 2 | Year 3 | Value |
---|---|---|---|

Invest $1 | Interest = $1 * 1.10 Value = 1.10 | 1.10 + (1.10 * .10) | $1.21 |

Invest 2nd $1 | Interest = $1 * .10 Value = 1.10 | $1.10 | |

Invest 3rd $1 | $1 | ||

Future Value of investing a dollar a year for three years at 10% | $3.31 |

Now let’s say that instead of depositing your money at the end of year you deposit one dollar at the beginning of each of the three years at 10% interest. Thanks to compound interest the value of your investment at the end of the three years would be $3.64.

Since the deposits will be made at the beginning of the period we need to enter a

The Excel Future Value formula to compute this would be **
=FV(10%,3,1,,1)**

Year 1 | Year 2 | Year 3 | Value |
---|---|---|---|

Invest $1Interest = $1 * .10 Value = 1.10 | $1.10 + ($1.10 * 10%) Value = 1.21 | 1.21 + (1.21 * .10) | $1.33 |

Invest 2nd $1Interest = $1 * .10 Value = 1.10 | $1.10 + ($1.10 * 10%) Value = 1.21 | $1.10 | |

Invest 3rd $1Interest = $1 * .10 Value = 1.10 | $1.21 | ||

Future Value of investing a dollar a year for three years at 10% | $3.64 |

You want to know how much money you would have in the bank if you deposited $150 every month for 5 years. You can think of this as making payments to yourself. The bank pays 3.5% interest. You make the deposits at the end of each month.

- Enter the data as shown below
in an Excel worksheet. Payments(deposits) are always entered as a negative number because they are a cash outlay.
If you don't make the Payments a negative number your future value will be
displayed as a negative number.

The Nper is the number of periods which is the number of deposits. The deposits are made once a month for 5 years. Enter**=5 * 12**in cell B2.

- In cell B5 type
**=FV(**

The rate is determined by taking the annual interest rate in cell B1 and dividing it by 12 to get the monthly interest rate.

Type**B1/12**Type a comma to go to the next argument.

The number of periods (nper) is the value in cell B2.

Type**B2,**

The Payments are the monthly deposits into the bank.

Type**B3**

Press Enter.

If you deposited $150 dollars at the end of each month for 5 years at 3.5% interest you would have $9,819.92