Prudent investors often develop a habit of periodically depositing a set amount of money into a savings account or other investment vehicle. For example, your client may wish to deposit $5,000 per year into an investment at the beginning of each year for 5 years, earning 6 percent interest. This scenario describes a future value of periodic deposits (FVPD) problem. Periodic deposits are a series of equal payments made at the beginning of each year (or period) for a specified number of years (or periods).

The formula to calculate the future value of periodic deposits is as follows:

          FVPD = I (1 + i)n

where FVPD = future value of periodic deposits

                I = amount invested each period

    I (1 + i)n = FVif = futurevalueinterestfactorfor the periodic investment (See table," One Dollar per Annum in Advance," in appendix A.)

EXAMPLE:

Assume that your client begins today to deposit $5,000 each year for the next 3 years at an annual interest rate of 6 percent. How much will he have at the end of 3 years?

The factor from the compound interest table for a 6 percent interest rate and a 3-year investment horizon is 3.375. Thus, the future value of the deposits in this example is

FVPD = $5,000 x 3.375 = $16,875

Logic dictates that the higher the interest rate and the longer the time horizon, the higher the future value will be.

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 FA 261 use Table A-2.