ShmoopTube

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Finance a la shmoop, what is a future value calculation?

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[Meditating]

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Yeah all right that was supposed to be a Swami sorry yeah maybe this should be

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more like a mirror mirror on the wall street thing who's the futurist value of [Girl talking to the mirror]

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them all, yeah maybe not.. All right well hopefully you get the

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gist a present value that is where you take a pot of profit supposedly being [Pot of gold at the end of a rainbow]

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given to you at some point in the future 'n' years away it carries some risk and [Leprechaun at the other end of the rainbow]

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there is a current safe or risk-free guaranteed rate of return that this risk [Coins with risk on going to the Leprechaun]

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has to sit upon got it so that present value is some discount to whatever [Present value definition written on a 100 dollar bill]

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future values are coming your way, like you have an 8% risk premium that sits on

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top of a 3% safe rate of return like a government bond that guarantees you 3% [Government bond certificate]

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and if the US government bonds are wiped out well it means that we've been nuked

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and while you're just a zombie glowing in the dark so you don't worry about [3 zombies walking towards the screen]

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your investment returns at that point. All right so here's an example you're

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promised 10 grand in five years and well now you

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have to discount it back to its present value as ten grand over that 1+1 0.08 [Calculation is shown]

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plus point three, that's 1.11 to the fifth power there in the

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denominator which is combined during the math area it's a hair under 6 grand so [Loading symbol then the answer appears]

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that's the present value of 10 grand five years from now discounted back for

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risk and time all right so future value is the inverse thing I'm

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not quite the inverse math but we're getting there [The calculation is crossed out]

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Here you're just taking a given compounded number in whatever form and

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coming up with its future value like you're buying a bond that pays 5% a

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year interest and you want to know how much cash it will have thrown off in the [Money falling from the bond certificate]

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next 10 years before its principal then comes due and pays all right well you'll [Lots of money starts falling]

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add up the flows of cash and we'll say 100 grand invested that's 5 grand a year

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in interest or $2,500 twice a year all right and you nerd lingers in the back [People sat in class]

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are asking whom but what about the cash you get sooner rather than later

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you could reinvest that make yet more money shouldn't that money go into the [Girl at the back of the class]

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future value calculation, well yes that distributed money just gets recompiled

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and thrown into the stone soup of future value financial calculations thank you [Guy throws cash into the pan full of soup]

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nerd lingers but a key point here in noting what the concept is of a [A bowl of soup with money in it]

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future value calculation is that there is risk and there is a risk-free rate

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and they kind of get married and sit on top of each other in a g-rated way [Guy sits on a girls knee and she kicks him away]

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they're all financial leeches against what the total future value might be so

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if we have this calculation of a hundred grand invested you can see we have ten

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years of giving five grand a year that's 50 grand in total fee add everything up [Timeline showing the investment]

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then you get your hundred grand back at the end and your total cash returns to

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you will be yes a hundred fifty thousand dollars but it's worth more than that [The total returns calculation is shown]

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because you receive the money along the way and you could invest it and gain

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more dough yeah god it's how compounding works, got it? So when in doubt consult [Hand waving over a crystal ball]

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the crystal ball or the magic mirror if you've got one. Mirror mirror on the

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future value, something like that...

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