ASCERTAINING THE FUTURE VALUE

In the modern scenario where there is always uncertainty in the environment, it's very important for the people to save some part of their income i.e to facilitate savings.But savings will only be useful when it maintains the value of money.


Now the question arises what's the value of money??

Money value for a person refers to his purchasing power i.e. how much purchase he can make with his given income.

For example:If there is inflation in the economy i.e prices of commodities increases but the income remains same so the purchasing power of people decreases as the value of money decreases and in case of deflation the prices of commodities decreases and as a result purchasing power increases.


In order to combat such situations a new concept called 'investments' was developed in which a person uses his idle money in various securities or funds so that a reasonable interest can be gained.


As an investor every person wants to know the future value of his investment in a particular time period which influences his decision of investing.

Let's take an example:Assume a common consumer wants to use his savings of INR 10000 in a fixed interest securities so that he doesn't have to bear the market risks.It is known as conservative investment i.e fixed return with zero risk. For ascertaining the future value(FV) we must have 3 important information:

(1) amount of investment i.e present value(PV)

(2) rate of interest on investment(i)

(3) Time period for which the amount is invested(n)


It can be represented by following formula:

Lets understand it with an illustration:

Suppose the person invested INR 10000 in a 12% government securities for a period of 2 years

Now the future value will be:


FV=PV *(1+i)^n


=10000*(1+0.12)^2

=INR 12544


Therefore, future value will be INR 12544


Here it must be noted that a person invests it's amount only when he gets the benefit of 'compounding'.


Compounding means earning interest on interest earned.

In the above illustration if interest is calculated separately then for the first year interest will be INR 1200(10000*12%)

and for the second year interest will be INR 1344[(10000+1200)*12%].

Total interest:INR 2544(1200+1344)

VALUE AFTER 2 YEARS=INR 12544(10000+2544)