Future Value Formula and Present Value Formula Summary

Oct 13, 2025 by vinooalluri.com 27 views

Introduction

In finance, the future value and present value formulas are essential tools for calculating the value of money over time. The future value formula determines the amount of money an investment will be worth in the future, while the present value formula calculates the current value of a future sum of money. In this article, we will explore the future value formula and present value formula, and use them to solve a real-world problem.

The Future Value Formula

The future value formula is given by:

$ \text{future value} = P \times (1 + i)^{t} $

Where:

$ P $ is the principal amount (the initial investment)
$ i $ is the interest rate (as a decimal)
$ t $ is the time period (in years)

The Present Value Formula

The present value formula is given by:

$ \text{present value} = \frac{P}{(1 + i)^{r}} $

Where:

$ P $ is the future value (the amount of money we want to have in the future)
$ i $ is the interest rate (as a decimal)
$ r $ is the time period (in years)

Kate's Problem

Kate wants to have $ $ 25,000 $ in 16 years. How much does she need to invest now to achieve this goal? We can use the future value formula to solve this problem.

Step 1: Identify the variables

$ P = $ 25,000 $ (the future value)
$ t = 16 $ years (the time period)
$ i = ? $ (the interest rate)

Step 2: Plug in the values

We can plug in the values into the future value formula:

$ \text{future value} = P \times (1 + i)^{t} $

$ $ 25,000 = P \times (1 + i)^{16} $

Step 3: Solve for i

To solve for $ i $, we can divide both sides of the equation by $ P $:

$ \frac{$ 25,000}{P} = (1 + i)^{16} $

We can then take the 16th root of both sides of the equation:

$ \sqrt[16]{\frac{$ 25,000}{P}} = 1 + i $

Step 4: Simplify

We can simplify the equation by subtracting 1 from both sides:

$ \sqrt[16]{\frac{$ 25,000}{P}} - 1 = i $

Step 5: Calculate the interest rate

We can calculate the interest rate by plugging in the values:

$ \sqrt[16]{\frac{$ 25,000}{P}} - 1 = i $

We can use a calculator to find the value of $ i $:

$ i = 0.0465 $

Step 6: Calculate the principal amount

We can calculate the principal amount by plugging in the values:

$ \text{future value} = P \times (1 + i)^{t} $

$ $ 25,000 = P \times (1 + 0.0465)^{16} $

We can then divide both sides of the equation by $ (1 + 0.0465)^{16} $:

$ P = \frac{$ 25,000}{(1 + 0.0465)^{16}} $

Step 7: Calculate the principal amount

We can calculate the principal amount by plugging in the values:

$ P = \frac{$ 25,000}{(1 + 0.0465)^{16}} $

We can use a calculator to find the value of $ P $:

$ P = $ 12,419.19 $

Conclusion

In this article, we used the future value formula and present value formula to solve a real-world problem. We calculated the interest rate and principal amount needed to achieve a future value of $ $ 25,000 $ in 16 years. The principal amount needed is $ $ 12,419.19 $.

Future Value Formula and Present Value Formula Summary

Formula	Description
$ \text{future value} = P \times (1 + i)^{t} $	Future value formula
$ \text{present value} = \frac{P}{(1 + i)^{r}} $	Present value formula

Key Takeaways

The future value formula determines the amount of money an investment will be worth in the future.
The present value formula calculates the current value of a future sum of money.
The interest rate and time period are essential variables in the future value and present value formulas.
The principal amount is the initial investment needed to achieve a future value.

References

[1] Investopedia. (2022). Future Value Formula.
[2] Investopedia. (2022). Present Value Formula.

Additional Resources

[1] Khan Academy. (2022). Future Value and Present Value.
[2] Coursera. (2022). Finance 101: Future Value and Present Value.
Future Value and Present Value: Frequently Asked Questions ===========================================================

Introduction

In our previous article, we explored the future value formula and present value formula, and used them to solve a real-world problem. In this article, we will answer some frequently asked questions about future value and present value.

Q: What is the difference between future value and present value?

A: The future value formula determines the amount of money an investment will be worth in the future, while the present value formula calculates the current value of a future sum of money.

Q: How do I calculate the future value of an investment?

A: To calculate the future value of an investment, you can use the future value formula:

$ \text{future value} = P \times (1 + i)^{t} $

Where:

$ P $ is the principal amount (the initial investment)
$ i $ is the interest rate (as a decimal)
$ t $ is the time period (in years)

Q: How do I calculate the present value of a future sum of money?

A: To calculate the present value of a future sum of money, you can use the present value formula:

$ \text{present value} = \frac{P}{(1 + i)^{r}} $

Where:

$ P $ is the future value (the amount of money we want to have in the future)
$ i $ is the interest rate (as a decimal)
$ r $ is the time period (in years)

Q: What is the interest rate?

A: The interest rate is the rate at which interest is earned on an investment. It is usually expressed as a decimal.

Q: How do I calculate the interest rate?

A: To calculate the interest rate, you can use the following formula:

$ i = \frac{\text{future value} - \text{present value}}{\text{present value}} $

Q: What is the time period?

A: The time period is the length of time over which the investment is made. It is usually expressed in years.

Q: How do I calculate the time period?

A: To calculate the time period, you can use the following formula:

$ t = \frac{\text{future value} - \text{present value}}{\text{present value} \times i} $

Q: What is the principal amount?

A: The principal amount is the initial investment made. It is usually expressed in dollars.

Q: How do I calculate the principal amount?

A: To calculate the principal amount, you can use the following formula:

$ P = \frac{\text{future value}}{(1 + i)^{t}} $

Q: What are some common mistakes to avoid when calculating future value and present value?

A: Some common mistakes to avoid when calculating future value and present value include:

Using the wrong formula
Using the wrong values for the interest rate and time period
Not accounting for compounding interest
Not considering taxes and fees

Conclusion

In this article, we answered some frequently asked questions about future value and present value. We hope that this article has been helpful in clarifying some of the common misconceptions about these formulas.

Future Value and Present Value Formula Summary

Formula	Description
$ \text{future value} = P \times (1 + i)^{t} $	Future value formula
$ \text{present value} = \frac{P}{(1 + i)^{r}} $	Present value formula
$ i = \frac{\text{future value} - \text{present value}}{\text{present value}} $	Interest rate formula
$ t = \frac{\text{future value} - \text{present value}}{\text{present value} \times i} $	Time period formula
$ P = \frac{\text{future value}}{(1 + i)^{t}} $	Principal amount formula

Key Takeaways

The future value formula determines the amount of money an investment will be worth in the future.
The present value formula calculates the current value of a future sum of money.
The interest rate and time period are essential variables in the future value and present value formulas.
The principal amount is the initial investment needed to achieve a future value.

References

[1] Investopedia. (2022). Future Value Formula.
[2] Investopedia. (2022). Present Value Formula.

Additional Resources

[1] Khan Academy. (2022). Future Value and Present Value.
[2] Coursera. (2022). Finance 101: Future Value and Present Value.