Question

The principal of the time value of money is probably the single most important concept in financial management. One of the most frequenty encountered applications involves the calculation of a future value. The process for converting present values into future values is called knowledge of the values of three of fourtime-value-of-money variables. which of the following is not one of these This process requires ariables? O The interest rate (1) that could be eamed by deposited funds O The duration of the deposit (N) O The trend bebween the present and future values of an investment O The present value (PV) of the amount deposited All other things being equal, the numerical difference between a present and a fubure value corresponds to the amount of interest eamed during the deposit or investment period. Each line on the following graph corresponds to an interest rate: 0%, 10%, or 19%. Identify the interest rate that corresponds with each line. VALUE IDollars 0 1 2 3 5 67B 9 10 TIME (Years Line A: Line B Line C: Investments and loans base their interest calculations on one of two passib the rate, and the investment or deposit period-to the amount deposited or invested in order to compute the amount of interest. However, the two methods differ in their relationship between the variables. interest and interest methods. Both methods apply three variables-the amount of principal, the interest Assume that the variables I, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. which equation best represents the calculation ofa future value (FV) using Compound interest? Simple interest? FV=PV/(1 x 1 x N)

Answer 1

1: compounding

(Future value is determined by compounding the present value at the rate of interest)

2: Option 3: Trend between the present and future values of an investment.

(FV= PV*(1+r)^n . r is the interest rate, n is the duration ; PV is present value )

3: Project A = 19% (Since that will give maximum future value due to highest interest rate)

Project B = 10%

Project C = 0%

4: Simple and compound

(There are two type of interest, simple and compound interest)