Reference no: EM133265597
Answer the following prompts from the information below.
- Confirm the calculations or explain a correction to the calculation.
- Summarize how the rate (r), the time period (n), and the amount of the cash flow or value used in the equation impacts the conclusion.
- Compare how the rate (r) impacts the value in a present value problem to a future value problem.
Compute the future value of $2,000, at an interest rate of 5%, compounded annually, in 6 years.
The formula is given below to compute the present value of a single cash flow.
FVn = PV0(1 + r)n
FVn - represents the future value at the end of the period
PV0 - represents the present value of the cash flow
r - the periodic interest rate
n - the number of compounding periods until maturity
From the problem, $2,000 represents the present value, 5% represents the interest rate and 6 years means the number of compounding periods.
Substituting the values into the formula will give;
FV=2000(1+0.05)6
FV=2000(1.05)6
FV=2000(1.34)
FV= $2680.19
The problem was to find the future value of a principal($2,000) at the end of a maturity period of 6 years with a compounding interest rate of 5%. In other words, how much principal + interest will a rate of 5% yield in a period of 6 years when compounded annually?
If the rate was higher in my problem, the solution will be higher. This is because an increase in interest rates increases the future value of a principal and vice versa.
If the time period for my problem were shorter, my solution would be lower. This is because the future value of a principal will be lower since the compounding periods have been reduced.
A challenging element of this discussion was formatting the subscripts and superscripts in the formula.
With the time value of money mathematics, are there other factors that might affect the outcome of future or present values?
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