Multiple Choice
Using a time value of money table, what is the future value interest factor (FVIF) for an interest rate of 10\% over 2 years?
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
What is the future value of \$1,200 invested for 20 years at an annual interest rate of 6%, compounded annually? (Use the formula: \(FV = PV \(\times\) (1 + r)^n\))
A
\$4,200.00
B
\$3,846.48
C
\$6,120.00
D
\$2,400.00
Verified step by step guidance1
Step 1: Identify the variables in the formula for future value (FV = PV × (1 + r)^n). Here, PV (Present Value) is \$1,200, r (annual interest rate) is 6% or 0.06, and n (number of years) is 20.
Step 2: Substitute the values into the formula. The formula becomes FV = 1200 × (1 + 0.06)^20.
Step 3: Calculate the term inside the parentheses first. Add 1 to the interest rate: 1 + 0.06 = 1.06.
Step 4: Raise the result (1.06) to the power of 20. This represents the compounding effect over 20 years.
Step 5: Multiply the present value (1200) by the result from Step 4 to find the future value. This will give you the final amount after 20 years of compounding.
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