Present Value
1
Write down the present value equation. Calculating the present value shows you the amount of money you need to invest today in order to save a desired amount of money over a specified number of years at a specified rate of return.
Present Value = Future Amount / (1 + Rate of Return)^term
2
Define the variables. Assume you want to save $100,000 by the end of 10 years. You have found an annuity offering a minimum rate of 3 percent, guaranteed annually.
Present Value = $100,000 / ( 1 + .03)^10
3
Calculate the present value.
Present Value = $100,000 / (1.03)^10 = $100,000 / 1.629 = $61,388.
You need to invest a minimum of $61,388 today to achieve your goal.
Future Value
1
Write down the future value equation. The future value determines what your investment today will be worth down the road. This helps people understand how existing assets will grow.
Future Value = Present Value (1 + rate of return)^term
2
Define the variables. Assume you have $10,000 to invest and want to see how a 5 percent interest rate will grow the asset over 20 years.
Future Value = $10,000 (1 + .05)^20
3
Calculate the future value.
Future Value = $10,000 (1.05)^20 = $10,000(2.6532) = $26,532
The future value of your investment is $26,532, based on the assumptions.
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