1.2.1.1.1 Calculating the Future Value (of a Present Sum)
There are two ways to calculate the future value of something that you expect to increase in value at an average rate each year. There’s a formula (which involves a calculator trick) and a rule of thumb, each of which you should know.
The actual formula for calculating the future value of a sum is:
future value = principal x (1 + r)t
In this formula, the “r” stands for the interest rate earned during the period and the “t” stands for the number of periods over which you will be compounding (growing) the sum. So the formula can be rewritten:
future value = principal x (1 + interest rate)number of periods
Aside from memorizing this formula, though, don’t worry about being able to compute it by hand, since a basic calculator will be provided by the testing center.
On your basic exam calculator, you can determine the future value by using the following procedure. Start by converting the