HOW TO CALCULATE FUTURE VALUE

There are two ways to calculate future value which is by using simple annual interest and annual compound interest.

Simple Annual Interest

Future Value = Present Value x [1 + (Interest Rate x Number of Years)]

For example, Bob invests $1,000 for five years with an interest rate of 10%. The future value would be $1,500.

Future Value = $1,000 x [1 + (0.1 x 5)]

Future Value = $1,000 x 1.5

Future Value = $1,500

Annual Compound Interest

Future Value = Present Value x [(1 + Interest Rate) ^{Number of Years}]

For example, John invests $1,000 for five years with an interest rate of 10%, compounded annually. The future value of John's investment would be $1,610.51.

Future Value = $1,000 x [(1 + 0.1)⁵]

Future Value = $1,000 x 1.61051

Future Value = $1,610.51

NOTE: important to remember that simple interest is always based on the present value, whereas compounded interest means that the present value grows exponentially each year.