FV Function is used for calculating the future value of a current amount of money. As discussed in Time Value of Money, value of an amount of Money changes over time. FV Function helps us for calculating how much a current amount money will value in future.
Snytax for FV() Function:
rate – Interest Rate
Nper – Payment Periods
FV – Future Value
Type – 1 if payment is at the beginning of the period, 0 if payment is at the end of the period
You need to provide first 3 variables in order FV() Function to work. Last 2 variables are optional.
For compound interest rate calculations, see Compound Interest in Excel.
George asks John for a loan of 20,000$ and promises to pay him 1,100$ for 20 months. Should John give George the money or should he invest money on different things to earn more? (assuming annual interest rate is 15%)
Our formulation with PV() Function for this deal is:
PV=(15%/12 ; 20 ; -1100$ ; 0 ; 0) = 24,819$
So 1000$ monthly payments for 20 months will be equal to 24,819$ 20 months later. If John would put his money in a compound interest, he would get 25,640$ at the end of 20 months. John should pass on this offer because current offer is not in his favor.
Jane gives her 50,000$ to an investor for 2,000$ monthly payments for 24 months and 10,000$ one time payment at the end of 24 months. Is this investment profitable for Jane? (assuming annual interest rate is 15%)
Our formulation with FV() Function for this deal is:
FV=(15%/12 ; 24 ; -2,000$ ; 10,000$ ; 0) = 14,525$
If Jane would have put her money on compound interest, she would get 67,367$ in return. Since her current deal will get her 69,050$, this deal is profitable for Jane.