You can use FV Function to calculate the future value of an investment. An investment which is based on periodic and constant payments and on a constant rate of interest.
In simple words, it will return a future value of an investment where you have constant payments and constant interest rate throughout the investment period.
- rate A constant interest rate which you want to use in the calculation.
- nper Number of payments.
- pmt A constant payment amount to pay periodically throughout the investment time.
- [pv] The present value of future payments. It must be entered as a negative value. 0 if omitted.
- [type] A number to specify when payment is due. 0 = at the end of the period, 1 = at the beginning of the period.
More Information On Excel FV Function
- Make sure you have specified rate and number of payments in a consistent manner. If the rate is for annual basis then you have to specify payment periods on the annual basis as well. And, if you want to specify payments on a monthly basis you have to convert interest rate on the monthly basis by dividing by 12. Same for quarterly and half yearly basis.
- If pmt is the cash which you have paid (i.e deposits to saving, etc), the value must be negative; and if it is the cash received(income, dividends), the value must be positive.
In the below example, I have used 10% interest rate, 5 payments on a yearly basis, $1000 payment amount, no PV amount and payment type at the beginning of the period.
The function has return 6716 in the result.
Let me explain you the phenomena working behind FV Function. At the beginning of each period, it will calculate the interest on payment and carry forward that amount (Actual Amount + Interest)to the next period. And, in next period again same calculation will be done and so on.
The best part of FV Function is that it can do this step by step calculation for you in a single cell.
In above example, I have used monthly payments. For this, I have converted annual interest rate into month by dividing by 12. And, I have mentioned 60 months instead of 5 years.
In PV, I have specified 10000 for payment. And, the function has returned $94536.
You can also use Excel FV Function to calculate compound interest. Rather than specifying periodic payment amounts, I have specified pv, as payment is already done. Learn more about calculating compound interest on different Basis.
To learn more about Excel FV Function you can check Microsoft’s Help Section. And, if you have a unique idea to use it, I would love to hear from you.