Now that you are familiar with the concept of time value, let's see how you can utilize time value of money calculator to define the future value of present money or the present value of money received in the future.
Before all of that, let's check what parameters you can set during the computation.
Present value (PV) is the present value of the future money.
Future value (FV) is the future value of the present amount.
Interest rate (i) is the annual nominal interest rate per period in percent.
Term (t) constitutes the lifespan between the present (Time 0) and the future time we are calculating to (Time x), converted into years.
Compounding frequency (n) refers to the number of times compounding occurs per period. You can choose the frequency as continuous as well, which is theoretically the maximum compounding frequency. In this case, the number of periods when compounding applies is an infinite number.
This calculator works in such a way that you can input your known values and you will receive the value you want. It's that simple!
Finally, the time value of money formulas employed during the computation are the following:
FV = (PV * (1 + (i / n)) ^ (n * t))
PV = (FV / (1 + (i / n)) ^ (n * t))
In the case of continuous compounding, the below equations are used:
FV = PV * e ^ (i * t)
PV = FV / e ^ (i * t)
where e stands for the exponential constant, which is approximately 2.718.
Now, we can easily estimate the future value of $100 from the previously mentioned simple example.
PV = 100$
t = 3
i = 5%
n = 1
FV = (100 * (1 + (5 / 1)) ^ (1 * 3)) = 115.76
Thus, $100 in your pocket now would worth $115.76 three years later if a 5 percent interest rate is applied and compounding occurs yearly.
