Like the time value of money concept, we further need to understand the future value of money which are:
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What do we mean by Future Value Of Money? |
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The future value is merely the amount an investment would grow to if it accumulates interest at a certain interest rate COMPOUNDED over the terms of the investment.
To understand the future value of money, we need to understand compound interest.
For example, if we have cash, $10,000 and if we were to put this $10,000 into a yearly time deposit which attracts a yearly interest rate of 10%. This present deposit of $10,000 will be growing at a COMPOUNDING INTEREST rate of 10% namely in Year 1 grow by $10,000 x 1.10=$11,100 which again in Year 2 grow by $11,100x 1.10 = $12,100
Therefore, for Now, we can see that our $10,000 has a future value of $11,100 in Year 1 and $12,100 in Year 2
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