Present and Future Value Math Example 1

Follow the full solution, then compare it with the other examples linked below.

Example 1

easy
Find the future value of \5{,}000investedat invested at 4\%annualinterestcompoundedannuallyfor annual interest compounded annually for 6$ years.

Solution

  1. 1
    The future value formula for compound interest is FV=PVβ‹…(1+r)nFV = PV \cdot (1 + r)^n.
  2. 2
    Substitute: FV=5000(1.04)6FV = 5000(1.04)^6.
  3. 3
    (1.04)6β‰ˆ1.2653(1.04)^6 \approx 1.2653, so FV \approx 5000 \times 1.2653 = \6{,}326.60$.

Answer

$6,326.60\$6{,}326.60
Future value tells you how much a present sum will be worth after earning compound interest. The formula FV=PV(1+r)nFV = PV(1+r)^n assumes interest is reinvested (compounded). The interest earned is \1{,}326.60β€”morethansimpleinterest( β€” more than simple interest (\1,2001{,}200) because of compounding.

About Present and Future Value

The concept that money has different values at different points in time. Future value (FVFV) calculates what a present amount will grow to; present value (PVPV) calculates what a future amount is worth today, using discounting.

Learn more about Present and Future Value β†’

More Present and Future Value Examples

Example 2 medium

How much should you invest today at [formula] annual interest compounded quarterly to have [formula]

Example 3 medium

An investment doubles in [formula] years with annual compounding. What is the approximate annual int

Example 4 hard

Compare the future values of [formula]10{,}000[formula]20[formula]6%$ with (a) annual compounding, (

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