Future Value Factor
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This equation computes the Future Value Factor of a fixed interest investment.
Inputs
- n - number of periods compound interest is to be applied to the initial principal. Typically the compounding periods are in months but this Future Value Factor can be computed for any integral compounding period.
- i - interest rate for the compounding period. Typically the period is a month and therefore an annual rate needs to be divided by 12.
EXAMPLES
The Future Value Factor approximates the amount of increase to an account which starts with some undefined initial principal and accrues interest over some number of compounding periods, n. This assumes the future worth (some principal value multiplied by this Future Value Factor) is due to compounding of the starting principal only. No additional principal in the form of payments to the account are added during the term encompassing the periods of compounding. The future value factor is a discount factor also referred to as the Single Payment Compound Amount (SPCA).
If you were to compute the Future Value Factor for a savings account into which some amount (initial principal) was deposited, and the interest rate was 4.5% annually (0.375% monthly entered as 0.00375) and the number of month you planned to keep the money in the account was 24 months, then the Future Value Factor would be approximated:
FactorFV =
So, the initial principal deposited would have increased by a factor of approximately 1.094 in 24 months.
This example is an approximation if the compounding period is a month, since all months are not the same length. But theoretically, this can also apply on an annual compounding basis, a daily compounding basis or any integral compounding period you desire. When applied to monthly compounding it must be considered an approximation.
The Future Value Factor applies to present and future value of an account as follows
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