ng.cengage.com/static/nb/ui/index.htmi?nbld-328444&nbNodeld; TO8I MindTap Assign

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ng.cengage.com/static/nb/ui/index.htmi?nbld-328444&nbNodeld; TO8I MindTap Assignment 05-Time Value of Money O Due Tomorrow at 11 PM ED of money is probably the single most important concept in financial management. One The principal of the time value of the most frequently encountered applications involves the calculation of a future value. The process for converting present values into future values is called _compounding This process requires of three of four time-value-of-money variables. Which of the following is not one of these knowledge of the values variables? O The duration of the investment (N) The inflation rate indicating the change in average prices O The present value (PV) of the amount invested O The interest rate (I) that could be earned by invested funds All other things being equal, the numerical difference between a present and a future value corresponds to the amount of interest earned during the deposit or investment period. Each line on the following graph corresponds to an interest rate: 0%, 10%, or 20%. Identify the interest rate that corresponds with each line. VALUE IDollars) C4 2

Explanation / Answer

        1 The Inflation rate indicating the   change in average prices is the variable   that is not involved in Compounding   calculation           2 Line A =20% Line B=10% Line C=0%         3 Compound interest Equation = FV=PV*(1+I)^N Simple Interets Equation = FV =PV +(PV*I*N)         4 After second year compound interest   based investment will eexceed the TRUE simple interest based invetsment All other factors remaining same the   simple and compound interest methods FALSE will not generate same amount of   interest afetr 1 year   Everyting other remaining constant, the   account earning compound interest will TRUE. grow more quickly than an account earning simple interest         5 Investment amount =$45000, duration 8 years Investment Interest rate & Method Expected future value Make this investment? L 7% compound             77,318 No M 6% simple interest             66,600 No N 11% compound           103,704 Yes

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