Future and Present Value of Money Calculation
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Questions and Answers

Why is knowing the future value (FV) important to investors and financial planners?

  • To determine the initial investment required
  • To estimate how much an investment will cost in the future
  • To assess the current value of an investment
  • To estimate how much an investment made today will be worth in the future (correct)

    • What does the Future Value (FV) formula assume?

  • Variable rate of growth and single upfront payment
  • Constant rate of growth and continuous reinvestment
  • Dynamic rate of growth and continuous compounding
  • Constant rate of growth and a single upfront payment left untouched for the duration of the investment (correct)

    • What is the future value (FV) of an asset?

  • The present value of the asset at a future date
  • The value of a current asset at a future date based on an assumed rate of growth (correct)
  • The value of a future asset at the present date
  • The current value of the asset at a future date

    • Under what conditions is the Future Value (FV) formula used?

    <p>When an investment earns simple interest</p> Signup and view all the answers

    What is the effect of external economic factors, such as inflation, on the future value of an asset?

    <p>It decreases the future value of the asset</p> Signup and view all the answers

    What is the purpose of calculating the future value (FV)?

    <p>To determine how much an investment made today will be worth in the future</p> Signup and view all the answers

    What is the future value (FV) of a Php. 1,000 investment held for 5 years with 10% simple interest paid annually?

    <p>Php. 1,500</p> Signup and view all the answers

    What concept states that an amount of money today is worth more than the same amount in the future?

    <p>Present Value</p> Signup and view all the answers

    What is the future value (FV) of a Php. 1,000 investment held for 5 years with 10% compounded annually?

    <p>Php. 1,610.51</p> Signup and view all the answers

    How does inflation affect the purchasing power of money over time?

    <p>It decreases the purchasing power</p> Signup and view all the answers

    What is the discount rate used for in the present value calculation?

    <p>To find the investment rate of return</p> Signup and view all the answers

    In simple interest, when is the interest rate earned?

    <p>Only on the initial investment</p> Signup and view all the answers

    What is the formula for the Future Value (FV) of an investment earning compounded interest?

    <p>$I (1 + R)^T$</p> Signup and view all the answers

    What effect does receiving money in the future have on its value compared to receiving the same amount today?

    <p>It reduces its value</p> Signup and view all the answers

    "Present value takes into account any ______ an investment might earn." Fill in the blank.

    <p>Interest rate</p> Signup and view all the answers

    What process causes prices of goods and services to rise over time?

    <p>Inflation</p> Signup and view all the answers

    What is the future value of an investment after 5 years with an interest rate of 8% compounded annually?

    <p>$1.4696I(1+0.08)^5$</p> Signup and view all the answers

    What is the future value of a Php. 2,500 investment held for 8 years with 12% simple interest paid annually?

    <p>$3,560</p> Signup and view all the answers

    How does inflation affect the future value of an asset?

    <p>Inflation reduces the future value by eroding the purchasing power of money</p> Signup and view all the answers

    What is the future value of an investment if $5,000 is invested at an annual interest rate of 10%, compounded semi-annually for 4 years?

    <p>$6,841.57</p> Signup and view all the answers

    What effect does compounding frequency have on the future value of an investment?

    <p>Higher compounding frequency increases the future value</p> Signup and view all the answers

    Why is it important to consider future value in investment decisions?

    <p>Future value allows for comparing investment opportunities over different time horizons</p> Signup and view all the answers

    What is the future value (FV) of a Php. 1,000 investment held for 5 years with 10% compounded annually?

    <p>Php. 1,610.51</p> Signup and view all the answers

    When is the interest rate earned in simple interest?

    <p>Only on the initial investment</p> Signup and view all the answers

    What process causes prices of goods and services to rise over time?

    <p>Inflation</p> Signup and view all the answers

    What concept states that an amount of money today is worth more than the same amount in the future?

    <p>Present value (PV)</p> Signup and view all the answers

    What is the discount rate used for in the present value calculation?

    <p>To discount future cash flows to their present value</p> Signup and view all the answers

    "Present value takes into account any ______ an investment might earn." Fill in the blank.

    <p>Rate of return</p> Signup and view all the answers

    What effect does receiving money in the future have on its value compared to receiving the same amount today?

    <p>It decreases due to opportunity cost</p> Signup and view all the answers

    "What is the purpose of calculating the future value (FV)?"

    <p>To assess potential investment returns</p> Signup and view all the answers

    "Under what conditions is the Future Value (FV) formula used?"

    <p>For calculating potential future earnings</p> Signup and view all the answers

    "What does the Future Value (FV) formula assume?"

    <p>That interest is earned only on the initial investment</p> Signup and view all the answers

    Study Notes

    Importance of Future Value (FV)

    • Knowing the FV is important to investors and financial planners as it helps them make informed decisions about investments and plan for future financial goals.

    Future Value (FV) Formula

    • The FV formula assumes that the interest rate remains constant over the investment period.
    • The FV formula is used to calculate the future value of an investment when the interest rate, principal amount, and time period are known.

    Definition of Future Value (FV)

    • The FV of an asset is the value it is expected to have at a future date, given the interest rate and time period.

    Effect of External Economic Factors

    • External economic factors, such as inflation, can affect the FV of an asset by reducing its purchasing power over time.
    • Inflation causes prices of goods and services to rise over time, reducing the value of money.

    Calculating Future Value (FV)

    • The purpose of calculating the FV is to determine the expected value of an investment at a future date.
    • The FV of a Php. 1,000 investment held for 5 years with 10% simple interest paid annually is Php. 1,500.
    • The FV of a Php. 1,000 investment held for 5 years with 10% compounded annually is Php. 1,610.51.

    Time Value of Money

    • The concept of time value of money states that an amount of money today is worth more than the same amount in the future.
    • Receiving money in the future has a lower value compared to receiving the same amount today.

    Calculating Future Value with Compounded Interest

    • The formula for the FV of an investment earning compounded interest is FV = PV x (1 + r)^n, where PV is the principal amount, r is the interest rate, and n is the number of years.
    • The FV of an investment after 5 years with an interest rate of 8% compounded annually is Php. 1,469.33.
    • The FV of a Php. 2,500 investment held for 8 years with 12% simple interest paid annually is Php. 5,200.
    • The FV of an investment if $5,000 is invested at an annual interest rate of 10%, compounded semi-annually for 4 years is $7,139.45.

    Compounding Frequency

    • The compounding frequency affects the FV of an investment, with more frequent compounding resulting in a higher FV.

    Importance of Considering Future Value

    • It is important to consider the FV in investment decisions as it helps investors make informed decisions about investments and plan for future financial goals.

    Discount Rate

    • The discount rate is used in the present value calculation to determine the present value of a future cash flow.

    Present Value

    • Present value takes into account any interest an investment might earn.

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    Description

    Learn to define, calculate, and analyze the future and present value of money in investment opportunities and loan applications. Understand the concept of future value (FV) as the value of a current asset at a future date based on an assumed rate of growth.

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