A financial tool, the Time Value of Money Calculator, helps you calculate the future value of an amount of money invested today or the present value of a future sum. It takes into account a specified interest rate and the number of years the money will be invested or borrowed.
Formula of Time Value of Money Calculator
Future Value (FV) Formula:
The Future Value (FV) is calculated as
FV = PV × (1 + Interest Rate)^nWhere:
- FV is the future value
- PV is the present value
- Interest Rate is the annual interest rate
- n is the number of years
Present Value (PV) Formula:
The Present Value (PV) is calculated as
PV = FV / (1 + Interest Rate)^nWhere:
- PV is the present value
- FV is the future value
- Interest Rate is the annual interest rate
- n is the number of years
General Terms Table
Here’s a table of commonly used financial terms and their meanings to help you better understand the Time Value of Money Calculator:
| Term | Definition |
|---|---|
| Future Value (FV) | The estimated worth of an investment at a specified point in the future. |
| Present Value (PV) | The current value of a sum of money, accounting for its future worth. |
| Interest Rate | The annual percentage rate applied to the initial amount. |
| Number of Years (n) | The duration for which the money is invested or borrowed. |
| Compound Interest | The interest calculated on the initial principal and any accumulated interest. |
| Discount Rate | The rate used to determine the present value of future cash flows. |
| Annuity | A series of equal payments or receipts made at regular intervals. |
| Compounding Period | The frequency at which interest is added to the principal amount. |
Example of Time Value of Money Calculator
Let’s illustrate how the TVM Calculator works with a simple example:
Suppose you have $1,000 (PV) that you want to invest for five years (n) at an annual interest rate of 5% (Interest Rate). To find the future value (FV) of your investment:
FV = 1000 × (1 + 0.05)^5 FV = 1000 × 1.2762815625 FV ≈ $1,276.28
So, in five years, your $1,000 investment will grow to approximately $1,276.28.
Most Common FAQs
A1: To use the TVM Calculator, input the present value (PV), interest rate, and the number of years (n) into the respective fields and click the “Calculate” button. The calculator will then provide you with the future value (FV) or present value (PV) of your investment.
A2: Yes, the TVM Calculator is a valuable tool for personal finance. You can use it to evaluate the potential growth of your savings, make informed investment decisions, and plan for future financial goals.