The future value refers to an amount of assets or the cash measured in a specified time of the future which should be equal to the amount being evaluated in the present time. Quite interestingly, the future value is measured through two effective methods and can help businesses and organizations before grilling up for the future investments.
It is labelled as ‘simple’ because the simple interest does not harbors the effect of compounding. In future value, the amount which is used to consider the ‘simple annual interest’ is based on its original principles. Therefore, the simple interest ignores the ‘interest on interest’ theory quite effectively. It is mainly used for evaluating interest being implemented on short-term loans where the compound value is not massive.
Formula: The Original Investment x [1+ (interest rate multiplied by number of years)]
The compound interest shares some characteristics with the simple interest. However, it values the initial principle rather than the original investment at the time of evaluation. It includes the interest amount of the previous periods or loans accordingly. Technically, the compounded interest is faster in terms of growing investments and deposits as it uses the ‘interest on interest’ theory.
Formula: The Original Investment x [(1+interest rate) race to the power (number of years)]
- If we invest an amount of $1000 for the next 5 years with simple annual interest of around 10%, we will get the future value of $1,500.00.
- If we invest the same amount for the next 5 years at the same rate, however, on compounded annual basis, the future value will cling upwards and become $1,610.51.
The experts refer the ‘future value’ as ‘binoculars’ ensuring that how much amount we might hold in the upcoming times compared with what we have today. Through this accountancy chapter, we can plan for long-term objectives.