Multiple Choice
You expect to receive \$5,000 in 25 years. How much is it worth today if the discount rate is 5.5\% compounded annually?
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
What is the future value of \$1,000 invested for 8 years at an annual interest rate of 6%, compounded annually?
A
\$1,480.24
B
\$1,593.85
C
\$1,268.24
D
\$1,850.00
Verified step by step guidance1
Understand the formula for future value (FV) in compound interest: FV = P × (1 + r)^n, where P is the principal amount, r is the annual interest rate (in decimal form), and n is the number of years.
Convert the annual interest rate from a percentage to a decimal by dividing it by 100. For this problem, 6% becomes 0.06.
Substitute the given values into the formula: P = \$1,000, r = 0.06, and n = 8. The formula becomes FV = 1000 × (1 + 0.06)^8.
Simplify the expression inside the parentheses first: (1 + 0.06) = 1.06.
Raise 1.06 to the power of 8 (1.06^8) and then multiply the result by \$1,000 to calculate the future value.
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