Let us assume that you deposit Rs.1000 in a bank that pays 10 percent interest compounded yearly for a period of 3 years. The deposit will grow as given details:
First Year

Principal at the beginning. Interest for the year (1000x.10) Total amount

Rs.
1000
100
1100

Second Year

Principal at the beginning. Interest for the year (1100x.10). Total Amount

1100
110
1210

Third Year

Principal at the beginning. Interest for the year (1210x.10)
Total Amount

1210
121
1321

To acquire the future value from current value for one year period:
FV = PV + (PV . k)
Here PV = Present Value;
k = Interest rate
FV = PV (1 + k)
As the same for a two year period:
FV = PV

+ (PV × k)

+ (PV × k)

+ (PV × k × k)

Principal amount

First period interest on principal

Second period interest on the principal

Second periods interest on the first periods interest

FV = PV+PVk+PVk+PVk^{2}
= PV+2PVk+PVk^{2}
= PV (1+2k+K^{2}) = PV (1+k)^{2}
Hence, the future value of amount after n periods is as:
FV = PV (1+k)n ............................Eq(1)
Here FV = Future value n years thus
PV = Cash today or present value
k = Interest rate par year in percentage
n = number of years for that compounding is done
Equation (1) is the fundamental equation for compounding analysis. Here the factor (1+k)^{n} is considered as the future value interest factor or the compounding factor (FVIFk,n). Published tables are obtainable showing the value of (1+k)^{n} for different combinations of k and n. In such table is specified in appendix A of this section.