- Introduction - Time Value of Money
- Interest Rates
- Interest Rate Equation
- Nominal Interest Rate and Effective Yield
- Time Value of Money for Different Compounding Frequencies
- Future Value of a Single Cash Flow
- Present Value of a Single Cash Flow
- Future Value and Present Value of Ordinary Annuity
- Present Value and Future Value of Annuity Due
- Present Value of a Perpetuity
- Present Value and Future Value of Uneven Cash Flows
- Annuities with Different Compounding Frequencies
- Using a Timeline to Solve Time Value of Money Problems
Future Value of a Single Cash Flow
Future value of a single cash flow refers to how much a single cash flow today would grow to over a period of time if put in an investment that pays compound interest.
The formula for calculating future value is:
Calculate the future value (FV) of an investment of $500 for a period of 3 years that pays an interest rate of 6% compounded semi-annually.
FV = 500*(1+6%/2)^(2*3) = $597.03
We can also solve this problem using the calculator as follows:
The BA II Plus calculator has the following five variables for Time Value of Money (TVM) functions.
N = Number of Periods (mT in our formula)
I/Y = Interest Rate Per Year (r)
PV = Present Value
FV = Future Value
PMT = Payment
The calculations are simple; you input the values that you know, and calculate the unknown.
To assign a value to a TVM variable, key in the number and press a TVM key – N, I/Y, PV, PMT, and FV.
To change the number of payments (P/Y) press 2nd, key in the number and press ENTER.
To calculate the unknown value, press Compute (CPT) and then press the key for unknown variable.
In our above example, enter PV = 500, change P/Y = 2 (semi-annual compounding), I/Y = 6, N = 6.
Then press CPT > FV. We get:
FV = 597.026
Similarly we can calculate the Future Value for any compounding frequency.