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FV: Calculating the future value of an investment

From: Excel 2010: Financial Functions in Depth

Video: FV: Calculating the future value of an investment

One of the more conservative investment strategies is to purchase a certificate of deposit or another fixed-rate annuity that trades lower risk for a relatively low but known rate of return. You can evaluate this type of investment using the future value or FV function. The FV function has five arguments and I've laid those out in this workbook. The first is the rate and that is the annual percentage rate. Then next is periods and that is the number of periods over which interest will be accumulated.

FV: Calculating the future value of an investment

One of the more conservative investment strategies is to purchase a certificate of deposit or another fixed-rate annuity that trades lower risk for a relatively low but known rate of return. You can evaluate this type of investment using the future value or FV function. The FV function has five arguments and I've laid those out in this workbook. The first is the rate and that is the annual percentage rate. Then next is periods and that is the number of periods over which interest will be accumulated.

So in this case, I have it set as 5 years. Then the next argument is the payment and this is the payment that you make every period. So for example in this case every year you'll put in an additional $10,000. Then we have the present value and that is $100,000 and that's the amount that you start with. You can think of it as a down payment on a house for example. Now both present value and payment are negative numbers, so they're displayed in parentheses. And the reason they're negative is because it's money that is flowing out of your account that you don't have control over anymore.

And then the final argument is type and type can either be 1 or 0 and it indicates when you make your payment. Anytime that you're paying off a house or a car or any other loan where the bank collects the interest, then typically you'll pay at the end of a period. Now on the other hand if you have an investment where you capture the benefits of the interest then it's in your best interest to make your payment at the beginning of a period and to indicate that in the type argument you give it the value 1.

Okay, so now with those arguments in place, we can click in cell B9 and create the formula. So I'll type equal and then fv for future value, then a left parenthesis and the rate is in b3, comma, period is in b4, the payment is in b5, the present value is in b6, and the type is in b7. Again 0 at the end of the period, 1 at the beginning. Then type a right parenthesis to close out the formula. Everything looks good. Press Enter and when we do we see that the future value of our investment would be a little bit over $193,000.

Now let's see what would happen if we change the type to 0 in other words making our payments at the end of a period. So to do that click in cell B7, then type a 0 and remembering that the current value of our investment is 193,000 and change, press Enter and we see that the future value drops by about $3000 and the reason that happens is because we make our payment later. So if you capture the interest, it's always in your best interest to pay early.

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This video is part of

Image for Excel 2010: Financial Functions in Depth
Excel 2010: Financial Functions in Depth

52 video lessons · 13182 viewers

Curt Frye
Author

 
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  1. 2m 11s
    1. Welcome
      1m 6s
    2. Using the exercise files
      36s
    3. Disclaimer
      29s
  2. 28m 32s
    1. PMT: Calculating a loan payment
      3m 31s
    2. PPMT and IPMT: Calculating principal and interest per loan payment
      4m 18s
    3. CUMPRINC and CUMIPMT: Calculating cumulative principal and interest paid between periods
      4m 30s
    4. ISPMT: Calculating interest paid during a specific period
      2m 13s
    5. EFFECT and NOMINAL: Finding nominal and effective interest rates
      3m 31s
    6. ACCRINT and ACCRINTM: Calculating accrued interest for investments
      4m 15s
    7. RATE: Discovering the interest rate of an annuity
      2m 41s
    8. NPER: Calculating the number of periods in an investment
      3m 33s
  3. 19m 5s
    1. SLN: Calculating depreciation using the straight-line method
      1m 48s
    2. DB: Calculating depreciation using the declining balance method
      3m 10s
    3. DDB: Calculating depreciation using the double-declining balance method
      3m 20s
    4. SYD: Calculating depreciation for a specified period
      2m 13s
    5. VDB: Calculating declining balance depreciation for a partial period
      3m 24s
    6. AMORDEGRC: Calculating depreciation using a depreciation coefficient
      2m 27s
    7. AMORLINC: Calculating depreciation for each accounting period
      2m 43s
  4. 22m 33s
    1. FV: Calculating the future value of an investment
      2m 48s
    2. FVSCHEDULE: Calculating the future value of an investment with variable returns
      2m 21s
    3. PV: Calculating the present value of an investment
      2m 6s
    4. NPV: Calculating the net present value of an investment
      3m 17s
    5. IRR: Calculating internal rate of return
      2m 33s
    6. XNPV: Calculating net present value given irregular inputs
      2m 32s
    7. XIRR: Calculating internal rate of return for irregular cash flows
      1m 48s
    8. MIRR: Calculating internal rate of return for mixed cash flows
      2m 2s
    9. DISC: Calculating the discount rate of a security
      3m 6s
  5. 24m 12s
    1. COUPDAYBS: Calculating total days between coupon beginning and settlement
      3m 2s
    2. COUPDAYS: Calculating days in the settlement date's coupon period
      2m 48s
    3. COUPDAYSNC: Calculating days from the settlement date to the next coupon date
      3m 1s
    4. COUPNCD: Calculating the next coupon date after the settlement date
      2m 43s
    5. COUPNUM: Calculating the number of coupons between settlement and maturity
      2m 55s
    6. COUPPCD: Calculating the date of a coupon due immediately before settlement
      3m 4s
    7. DURATION: Calculating the annual duration of a security
      3m 20s
    8. MDURATION: Calculating the duration of a security using the modified Macauley method
      3m 19s
  6. 28m 43s
    1. DOLLARDE and DOLLARFR: Converting between fractional prices and decimal prices
      2m 36s
    2. INTRATE: Calculating the interest rate of a fully invested security
      2m 50s
    3. RECEIVED: Calculating the value at maturity of a fully invested security
      2m 46s
    4. PRICE: Calculating the price of a security that pays periodic interest
      3m 19s
    5. PRICEDISC: Calculating the price of a discounted security
      2m 48s
    6. PRICEMAT: Calculating the price of a security that pays interest at maturity
      1m 57s
    7. TBILLEQ: Calculating the bond-equivalent yield for a Treasury bill
      1m 50s
    8. TBILLPRICE: Calculating the price for a Treasury bill
      1m 31s
    9. TBILLYIELD: Calculating the yield of a Treasury bill
      1m 41s
    10. YIELD: Calculating the yield of a security that pays periodic interest
      2m 59s
    11. YIELDDISC: Calculating the annual yield for a discounted security
      2m 9s
    12. YIELDMAT: Calculating the annual yield of a security that pays interest at maturity
      2m 17s
  7. 12m 1s
    1. ODDFPRICE: Calculating the price of a security with an odd first period
      3m 17s
    2. ODDFYIELD: Calculating the yield of a security with an odd first period
      3m 3s
    3. ODDLPRICE: Calculating the price of a security with an odd last period
      2m 44s
    4. ODDLYIELD: Calculating the yield of a security with an odd last period
      2m 57s
  8. 1m 5s
    1. Additional resources
      1m 5s

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