Using Future Value Versus Present Value in Multi-Step Questions
Course: Fundamentals of Financial Planning
Lesson 5: Using the Calculator
I am attempting to understand when to use PV or FV in the second step of the multi-step problems…the payment calculations. I understand that we will need to first calculate the required capital for the financial goal (Ex: retirement or college) and that would be the calculation of the present value in the first part of the problem.
However, when we get to the second part of the problem, the PV that was calculated in step one became the future value (FV) in step two. I’m trying to understand the rationale as to when to know if the capital required would be entered as the PV or FV in the second part of the problem when calculating the payment. It seems that if we solved for PV initially, then the PV is entered as FV when solving for payment. I just don’t really understand why.
Great question. This can be confusing. Here’s a quick example assuming today is 1/1/23 and Gigi will begin college on 1/1/25.
- In Part 1, how much capital is required by 1/1/25? In effect, we must calculate the capital required as of a future date using the PV required as of that future date.
- In step 2, how much must Gigi save annually to accumulate the capital required as of a future date (using the FV keystrokes)?
Let me know how completely that addresses your question.