We can also use the future value interest factor tables (FVIF) – see Table 1 in Appendix, to work out the future value of an amount today. The formula for this is:

FV_n = PV x FVIF (r%, n)

Where,

From the FVIF table, we must first determine the factor for FVIF (r%, n); in our example, r = 8%, and n = 2. Hence, looking down column (8%), the intersection with row (n = 2) across is 1.166.

Using this factor, we can calculate FV as:

FV = 100 x 1.166 = RM116.60

The next step is to investigate how the future value of our RM100 investment can be increased. The most obvious manner is to be able to earn a higher interest rate, say 10% per annum instead of 8%.

• Future value of RM100 given 8% compound interest for 2 years: RM116.64
• Future value of RM100 given 10% compound interest for 2 years: RM121.00

However, we can also achieve a higher return if the interest was compounded more frequently than once per annum (which is what financial institutions normally do). By earning interest, which is paid twice per year (semi-annually) or four times per year (quarterly), the future value of our RM100 will be much higher.

Given an interest rate of 8% for 2 years, the future value of RM100 would be RM116.64 (where interest is compounded annually) – the future value of RM100 at end of the same period, would be RM116.99 (if compounded semi-annually) and RM117.17 (if compounded quarterly).

Another way the future value of our RM100 can be increased would be to keep the money in the bank for a longer period of time (that is, by increasing the period, n in our equation). For example, RM100 if compounded at the same 8% but for a longer period would yield higher returns – for 4 years, the future value would be RM136.00, while for 6 years, the future value would be RM158.70.