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, a calculator trick, and a rule of thumb, all 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 you’ll be compounding (growing) the sum over. 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 percentage into a decimal and then add it to 1.00. For example, 7% becomes 0.0