Accumulation Factors, Future Value – Explained with Examples
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Accumulation factor is the accumulation at time t2 of an investment of 1 at time t1. It is denoted as A(t1, t2) for time t1 < t2. So, the accumulation at time t2 of an investment P at time t1 is PA(t1, t2). If t1 = 0, then it is common to denote A(n) for A(0, n).
For simple interest case, the accumulation factor can easily be defined as A(n) = (1+ni)
For compound interest case, the accumulation factor is A(n) = (1 + i)n. It is also called as compound value factor (CVFi,n) or compound interest factor or compound factor of a lump sum 1.
Numerical Problem
Q 1. An investor deposit $1000 in a bank account that accumulates to $1500 in 3 years. i) Calculate the accumulation factor A(0,3). ii) Calculate simple interest rate and compound interest rate pa for this investment.
[Watch video for solution of this numerical problem]