Use the formula - FV / (1+r) ^n ... make up a scenario of a particular asset or investment and describe how it would be valued. How much more would it be worth in a particular amount of time?

Question

Annalise Ferrell

Business

9 December, 08:26

Use the formula - FV / (1+r) ^n ... make up a scenario of a particular asset or investment and describe how it would be valued. How much more would it be worth in a particular amount of time?

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Answers (1)

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Dean Brock · Answer 1

See below

Explanation:

The formula in reference is a re-arrangement of the compound interest rate formula. The compound rate formula is used to calculate the future balance of a compound interest-earning account.

This particular formula is worked backward to calculate how much investment is needed to achieve a set goal.

For example, you desire to have $5000 in your account after six years. The bank pays an interest rate of 5%, how much must you save today to achieve your target?

Today amount will be the PV

FV = $5000

r=5%

n = 6years

PV = $5000 / (1+5/100) 6

PV=$5000 / (1+0.05) 6

pv = 5000/1.340095

pv=3,731.10

Meaning $3.731.10 will grow to $5000 after six years when invested in an account earning 5% compound interest.