Aa Aa The principal of the time value of money is probably the single most impor

Question

Aa Aa The principal of the time value of money is probably the single most important concept in financial management. One of the most frequently encountered applications involves the calculation of a future value. This process requires The process for converting present values into future values is called knowledge of the values of three of four time-value-of-money variables. Which of the following is not one of these variables? O The interest rate (r) that could be earned by deposited funds O The present value (PV) of the amount deposited O The duration of the deposit (n) The trend between the present and future values of an investment 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%, 8%, or 16%. Identify the interest rate that corresponds with each line. VALUE (Dollars 0 1 2 3 4 5 6 7 8 9 10 TIME (Years) Line A: Line B: Line C:

Explanation / Answer

Compounding

The trend between the present and future values of investment

Line A: 16%, Line B: 8%, Line C: 0%

compound

simple

Compound interest: PV * ( 1 + r)n

Simple interest: PV + (PV * r * n)

TRUE

FALSE

TRUE

Future value of investment L = 40,000 ( 1 + 0.09)6 = $67,084

Future value of investment M = 40,000 + ( 40,000 * 0.08 * 6) = $59,200

Future value of project P = 40,000 ( 1 + 0.15)6 = $92,522

Project L NO

Project M NO

Project P YES

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