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.
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