FV is one of the most important concepts in finance, and it is based on the time value of money. Investors need to know what the FV of their investment will be after a certain period of time, calculated based on an assumed growth rate. For instance, a $1,000 investment that pays a fixed interest rate of 5% will be $2,654 after 20 years, all things being equal. Therefore, the FV uses a single upfront investment and a constant rate of growth during the time horizon of the investment. On the downside, the FV is not adjusted for high inflation or changes in the interest rates, which are factors with a negative impact on any investment.
In a nutshell :
- Future value (FV) is the value of a current asset at some point in the future based on an assumed growth rate.
- Investors are able to reasonably assume an investment’s profit using the FV calculation.
- Determining the FV of a market investment can be challenging because of market volatility.