How is future value (FV) calculated?

Future value (FV) is calculated using the formula FV = PV × (1 + r)^n, where PV represents the present value, r is the interest rate, and n is the number of compounding periods. This formula reflects the concept of compounding, where the value of money increases over time due to accumulated interest.

The formula demonstrates that the future value is dependent on the present value and how it grows over time at a specific interest rate. The term (1 + r) represents the growth factor for each compounding period, and raising it to the power of n accounts for multiple compounding periods. Thus, by multiplying the present value by this growth factor raised to the number of periods, you can determine how much an investment will be worth in the future.

This approach captures the exponential growth of investment due to interest being applied to both the initial principal and the accumulated interest from previous periods. Understanding this calculation is crucial for making informed financial decisions regarding investments and savings.