Multiple Choice
What is the present value of \$1,200 to be received in 18 years if the discount rate is 5\% per year, compounded annually?
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
How is the future value of \$500 invested for one year at 6\% annual interest computed?
A
Future Value = \$500 \(\times\) 0.06
B
Future Value = \$500 - (\$500 \(\times\) 0.06)
C
Future Value = \$500 \(\div\) (1 + 0.06)
D
Future Value = \$500 \(\times\) (1 + 0.06)
Verified step by step guidance1
Step 1: Understand the concept of future value. Future value represents the amount of money an investment will grow to after earning interest over a specified period. It is calculated using the formula: Future Value = Present Value × (1 + Interest Rate).
Step 2: Identify the given values in the problem. The present value (initial investment) is \$500, the annual interest rate is 6% (or 0.06 in decimal form), and the time period is one year.
Step 3: Substitute the given values into the formula for future value. Using MathML, the formula is: . Replace 'Present Value' with 500 and 'Interest Rate' with 0.06.
Step 4: Perform the addition inside the parentheses first. Add 1 to the interest rate (0.06), resulting in 1.06. This step simplifies the formula to: Future Value = \$500 × 1.06.
Step 5: Multiply the present value (\$500) by the result of the addition (1.06). This will give the future value of the investment after one year at 6% annual interest.
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