Future Value : The future value of an asset or investment is the value of asset or investment on a specific date in future. Most of the people who use excel for financial analysis or accounting purpose rely heavily on the excel’s inbuilt function for deriving the future value.
FV = (rate, nper, pmt, [pv], [type])
Example: You just opened a bank account with Rs. 20000 and you have decided to deposit Rs. 4000 at the end of every month for next 10 years. The bank offers 9 per cent annual interest on the savings account. Now, you want to know how much money you will have in your account at the end of 10 years. Here you can use excel’s future value function to calculate the total amount that you will get at the end of 10 years.
Lets break this problem in key variables that will be required by the FV() of Excel.
Rate: 9 per cent per annum. But we need to calculate the monthly rate of interest as the period of payment is monthly. So Rate = 9%/12% = 0.75% or 0.0075 (Take note of the percentage sign).
Periods (nper): 120 months (10 years X 12 Months)
Payment (pmt) : -4000 (since its going out from your pocket, hence the minus sign)
Present Value (pv): – 20000 (same logic as above)
Type : 0 (if payment is deposited at the end of the period), 1 (if payment is deposited at the beginning of the period)
The function now becomes:
FV=(0.75%, 120, -4000, -20000,0)
You will get Rs. 823,084.25 as the result. This is the money you will receive at the end of the 10 years.