The future value1 is an anticipated gain or decline of today’s value predicted by equation 2.
VN = V0 (1+R)N
Equation 2 states that an initial value (V0) will increase or decline to some future value (VN) depending on the growth factor (1+R)N. The growth factor is determined by an assigned rate of return (R ) and an assigned exponent N (N is number of time periods). The rate of return can be converted to a percentage value by the factor 100. For example, R = 0.3 is converted to R = 30% by the product 0.3*100. An increase is expected when R is a positive value and a decline is expected when R is a negative value.
Copyright © 2011 Douglas R Knight
1. A.A. Groppelli and Ehsan Nikbakht. Chapter 3, the value of money over time, Finance, 5th Edition. Barron’s, New York, 2006.