Future Value Example

Prepared by Pamela Peterson

Problem

Suppose you are depositing an $5,000 today in an account that earns 5% interest, compounded annually. What will be the balance in the account at the end of six years if you make no withdrawals?

Solution

The following information is given:

We want to solve for the future value.

future value = present value (1 + interest rate)number of periods

or, using notation

FV = PV (1 + r)t

Inserting the known information,

FV = $5,000 (1 + 0.05)6

FV = $5,000 (1.3401)

FV = $6,701

We can use the future value table (also known as the table of compound factors) to solve for the future value.

FV = PV (compound factor for r and t)

The compound factor, from the table, is 1.3401. Therefore,

FV = $5,000 (1.3401)

FV = $6,701