Future value

Financial Analysis in Power BI

Nick Edwards

Capital Markets Analyst

What is time value of money?

Time value of money (TVM) is the concept that money is worth more now than in the future due to its earnings potential.

If you had invested $100 into the S&P 500 in 1957, it would be worth over $200,000 today!

A graph of the S&P 500 between 1957 and 2022. It shows an exponential increase in value over time.

¹ https://www.investopedia.com/terms/t/timevalueofmoney.asp

Future value (FV)

What your investment will be worth in the future based on a rate of return and length of time

Future value is the present value multiplied by one plus the interest rate to the power of the number of years.

Example: Find the value of $1,000 three years from now at a 5% interest rate.

FV = PV x (1+i)^n

FV = $1,000.00 x (1+0.05)^3

FV = $1,000.00 X (1.05)^3

FV = $1,000.00 X 1.15763

FV = $1,157.63

¹ https://www.investopedia.com/terms/t/timevalueofmoney.asp

Future value (FV)

What your investment will be worth in the future based on a rate of return and length of time

Future value is the present value multiplied by one plus the interest rate to the power of the number of years.

Example: Find the value of $1,000 three years from now at a 5% interest rate.

Year 1: $1,000.00 * 5% = $1,050.00

Year 2: $1,050.00 * 5% = $1,102.50

Year 3: $1,102.50 * 5% = $1,157.63

¹ https://www.investopedia.com/terms/t/timevalueofmoney.asp

The power of compounding

Compounding is the process in which an asset's earnings are reinvested to generate additional earnings over time.
Example: Compare $1,000 compounding annually vs. daily over 50 years at a 10% rate.

A clustered column chart that shows the difference between compounding annually and daily. Over 50 years, the difference is greater than $30,000.

¹ https://www.investopedia.com/terms/c/compounding.asp

Calculate with compounding interest

Step 1: Divide i by n
Step 2: Multiple y by n

Future value with compounding is the present value multiplied by one plus the interest rate divided by the number of compounding periods to the power of the number of years multiplied by the number of compounding periods.

Example: Find the value of $1,000 two years from now at a 5% interest rate compounding monthly.

FV = PV x (1+i/n)^(y*n)

FV = $1,000 x (1+0.0041)^(12*2)

FV = $1,000 X (1.0041)^24

FV = $1,000 X 1.10494

FV = $1,104.94

Annuities

Annuities are a cash flow structure where fixed payments are made at regular intervals

Shows an annuity cash flow structure of $500 every year for four years.

Annuities

Annuities are a cash flow structure where fixed payments are made at regular intervals

Shows an annuity cash flow structure of $500 every year for four years. To find the future value of an annuity, sum up the future value of each cash flow.

Annuities

Annuities are a cash flow structure where fixed payments are made at regular intervals

Shows an annuity cash flow structure of $500 every year for four years. To find the future value of an annuity, sum up the future value of each cash flow.

Annuities

Annuities are a cash flow structure where fixed payments are made at regular intervals

Shows an annuity cash flow structure of $500 every year for four years. To find the future value of an annuity, sum up the future value of each cash flow.

Annuities

Annuities are a cash flow structure where fixed payments are made at regular intervals

Shows an annuity cash flow structure of $500 every year for four years. To find the future value of an annuity, sum up the future value of each cash flow.

Let's practice!

Financial Analysis in Power BI