Future Value Interest Factor (FVIF)
FVIF calculator is an online aid for quickly calculating the future value of return on the amount invested today. The future value interest factor helps in providing the future value of earnings by multiplying the future value interest factor to be collected at a later date for the amount invested now. It considers the effect of compounding. FVIF is always more than one in any case, as the value of money keeps growing with time.
It helps determines the effective future value of cash flows based on the compounding concept of interest calculation. It is useful in the decision-making process or capital budgeting decisions.
In order to achieve future value interest factor, consider the following formula:
Future Value Interest Factor (FVIF) = (1 + r)n
Future Value = PV * FVIF
Where, PV = Present Value
r = Rate of Interest
n = Number of Compounding Periods
About the Calculator / Features
The calculator provides the future value of the amount by multiplying the future value interest factor with the present value. Future Value Interest Factor Calculator is a user-friendly calculator that provides instant results of calculation by simply entering the following figures:
- Present value
- Rate of interest
- Number of compounding periods
How to Calculate using Calculator
The future value interest factor (FVIF) calculator quickly provides the outcome of the problem by inserting the following details into it:
It is the rate of interest the user expects to earn on the investment.
Number of Compounding Periods
The user has to insert the number of compounding periods for which he wants to calculate the future value. The number of years and compounding period may be different when the interest factor is not compounded annually. If the factor is compounded semi-annually, then the number of compounding periods in a year is 2. Similarly, in the case of quarterly compounding, the periods are equal to 4.
The above will give us the FV Factor. Once we get this, then to determine the FV, we need to multiply this with the FV factor.
It is the value whose future value the user wants to calculate. This can be defined as the current value of a future sum.
We can also check the FVIF from the ready table to get the FV of the investments.
Example of FVIF
Let us take the help of a table to understand the future value interest factor concept at different rates of interest.
|n↓ / r→||1%||2%||3%||4%||5%||10%||12%||15%||20%||25%|
Let us consider an example for better understanding.
Suppose we have invested $5,000 in the bank for 4 years at an interest rate of 8%. Let us calculate the future value of this investment at the end of the 4th year.
Future Value Interest Factor = (1 + 0.08)4 = 1.3605
Future Value = $5,000 * 1.3605 = $6,802.44
The future value interest factor is also based on the concept of TVM (Time Value of Money). And is useful in real-life scenarios by determining the future value today itself of amount to be received on a future date. This improvises the decision-making process for investments.
In the example above, with the increase in time, future value has also increased. It simply implies that as long as there is some earning or the interest rate is more than zero, the future value will keep increasing.
FVIF being a very important concept in decision-making, have some limitations too. There is a pre-assumption that the growth rate is stable. But in the real world, it can be affected by a variety of risks such as inflation, external environment, liquidity risk, and much more. Hence, the selection of discount rates is crucial, and the outcome will be dependent upon that.