Excel includes several dozen financial formulas, but non-accountants use only a handful of these regularly. These all-purpose functions, described in the following sections, are remarkably flexible. You can use them to make projections about how investments or loans will change over time, or to answer hypothetical questions about investments or loans. For example, you can determine the interest rate or length of time you need to reach an investment goal or pay off a loan.
The FV( ) function lets you calculate the future value of an investment, assuming a fixed interest rate. Perhaps the most convenient feature of the FV( ) function is that it lets you factor in regular payments, which makes it perfect for calculating how money is accumulating in a retirement or savings account.
To understand how FV( ) works, it helps to start out by considering what life would be like without FV( ). Imagine that you've invested $10,000 that's earning a fixed interest rate of 5% over one year. You want to know how much your investment is going to be worth at the end of the year. You can tackle this problem quite easily with the following formula:
This calculation provides you with the future value—that is, the initial 100% of the principal plus an additional 5% interest.
It's just as easy to determine what happens if you keep your money invested for two years, reinvesting the 5% interest payment for an additional year. Here's the formula for that: