Microsoft Office Tutorials and References

In Depth Information

**Looking into the Future**

Looking into the Future

The FV function tells you what an investment will be worth in the future. The

function takes an initial amount of money and also takes into account

additional periodic fixed payments. You also specify a rate of return — the

interest rate — and the returned value tells you what the investment will be worth

after a specified period of time.

For example, you start a savings account with a certain amount, say $1,000.

Every month you add an additional $50 to the account. The bank pays an

annual interest rate of 5 percent. At the end of two years, what is value of the

account?

This is the type of question the FV function answers. The function takes five

arguments:

✓
Interest rate:
This argument is the annual interest rate. When entered

in the function, it needs to be divided by the number of payments per

year — presumably 12, if the payments are monthly.

✓
Number of payments:
This argument is the total number of payments in

the investment. These payments are the ones beyond the initial

investment; don’t include the initial investment in this figure. If payments

occur monthly and the investment is for three years, then there are 36

payments.

✓
Payment amount:
This argument is the fixed amount contributed to the

investment each payment period.

✓
Initial investment (also called PV or present value):
This argument

is the amount the investment starts with. A possible value is 0, which

means no initial amount is used to start the investment. This is an

optional argument. If left out, 0 is assumed.

✓
How payments are applied:
The periodic payments may be applied at

either the beginning of each period or the end of each period. This

argument affects the result to a small but noticeable degree. Either a 0 or a 1

can be entered. A 0 tells the function that payments occur at the end of

the period. A 1 tells the function that payments occur at the start of the

period. This is an optional argument. If left out, 0 is assumed.

When using the FV function, be sure to enter the initial investment amount

and the periodic payment amount as negative numbers. Although you’re

investing these monies, you’re essentially paying out (even if it’s into your

own account). Therefore, these are cash flows out.