Future Value Factor = (1 + r)n
r = rate per period
n = number of periods
Future value factor formula is utilized by financial analysts or investors to calculate the future value of an amount by using its present value. Future value factor can be found on a table which helps to make calculations simple for large amounts.
Basically, time value of money is the underlying concept behind the idea for future value factor formula. The time value of money means that a specific amount received today has more worth than the same amount received at a future date. Furthermore, any amount you have in your hand at present may have an opportunity to invest in a potential project to generate more profits, contrary while on the other side future receivables will not generate any additional earnings.
For instance, an amount of $150 to be received 6 months after present date seems more profitable rather to get $135 today. In such a case, a person can earn 10% extra if he opts to receive the amount in future.
Effect of rate per period
As with other formulas the rate may need some modification to calculate the precise future value factor. The rate must match with the period you are using while on the other side you must also take care about how frequent the amount is compounded. For instance, if annual nominal interest rate is 12% and investment is compounded on monthly basis. Therefore, we will convert annual rate to month which will be 1% and would be used in the formula as you can see in example below.
Future value factor formula example
We will continue with the above example, the formula for future value factor will be;
Future value factor = (1 + 0.01)12
In the above equation, 0.01 is rate which is 1% per month in the example above. By solving this equation, the future value factor for 12 months at the rate of 1% will be 1.1268.
Although there is a table available for future value factor which helps in quick calculation but one can also use above formula. By using above example, we add another thing in it where the person gets $500 after one year with same terms. The future value factor table shows a value of 1.1268 for 12 years at 1% rate. That factor will then be multiplied with $500 to find the future value of $500 and is;