Future value is one of the most important concepts in finance. Luckily, once you learn a few tricks, you can calculate it easily using Microsoft Excel or a financial calculator.
Let's look at an example to illustrate the process.
Assume you are trying save up enough money to buy a car at the end six months. You already have $10,000 in an account that pays 5% interest per year. You can add $1,000 to the account at the end of each month. How much will you have to spend on a car at the end of six months?
How to Calculate Future Value Using Excel:
1. The process will be easiest if you use the spreadsheet as a table to keep track of the different variables and periods you'll need for your calculation. First, label the cells in column A as follows:
A1 = the time period -- in this case, A1 = Months
A2 = Periodic Rate
A3 = Payment Amount
A4 = Present Value (PV)
A5 = Future Value (FV)
2. Next, fill in the information for the cells in each row.
B1-H1 = Months 0 - 6
B2-H2 = 0.417% (to calculate the periodic rate, take the annual rate from the example and divide by the number of periods per year. Using our example, Periodic Rate = 5.0% / 12 = 0.417%)
C3-H3 = -$1,000
B4 = -10,000
Note that because we're not making a payment today (at time 0), we don't put anything in cell B3. Also note that we've decide to make the amount negative because the $1,000 payments are coming out of our wallets and going in to the bank's account. They are cash outflows relative to you, the investor. We use the same idea for the present value of the money we've already set aside.
Your Excel spreadsheet should now look like this:
3. Now that we have our table, we are ready to calculate FV. First, select the cell at B5.
Next, click on the function button (fx) which is located right above the column labels. Once you click fx, a box will pop up.
4. Select the "Financial" category from the drop down menu and choose the FV function from the list. Then click "OK."
5. A new box will come up asking you to type in the amounts for each variable given.
Use your table to help you fill in the boxes -- you're being asked for all the information you already used to create your table. Once you have entered the amounts, the solution to FV will automatically appear in the bottom left corner of the box and be labeled "Formula result."
6. When you click "OK" to accept the solution, it will be displayed in the cell you selected next to future value. Your Excel spreadsheet should now look like this with this correct solution for FV:
How to Calculate Future Value Using a Financial Calculator:
Note: the steps in this tutorial outline the process for a Texas Instruments BA II Plus financial calculator.
1. Using our car example we will now find the future value of an investment by using a financial calculator. Before we start, clear the financial keys by pressing [2nd] and then pressing [FV].
2. Now we're ready to enter in all the information from our example. First, enter in the number of payments by pressing [6] and then [N]. The screen should now say N = 6.
3. Next, enter the periodic interest rate. To be precise, hit [CE/C] for a clear screen. Calculate the periodic rate by dividing 5 by 12 (which gives you 0.41666…) and then hitting [I/Y].
NOTE: For whatever reason, you don't key in 0.05 for 5% when using a financial calculator -- you key in the whole number "5." If you forget this, you will end up grossly under-calculating the interest rate used in the calculation.
4. Enter the payment amount for each month by keying (-$1000) and pressing [PMT]. Note that this has to be -$1,000 because the payments represent cash outflows with respect to the investor.
5. Finally, enter the present value amount (-$10,000) and press the [PV] key. It is a negative value for the same reason as the payment amounts.
6. Now you are ready to command the calculator to solve for future value. To calculate FV, simply press the [CPT] key and then [FV]. Your answer should be exactly $16,315.47. If you're off by a few cents, it is probably because you used fewer decimal places in your periodic interest rate.
Now that you've mastered future value, click here to learn How to Calculate Present Value Using Excel or a Financial Calculator. Or click here to see the financial calculators we've developed especially for InvestingAnswers' readers, including Return, Mortgage and Yield Calculators.
