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 (B)</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 (A)</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 (A)</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 (C)</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 (B)</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 (B)</p> Signup and view all the answers

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

<p>It decreases the purchasing power (A)</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 (D)</p> Signup and view all the answers

In simple interest, when is the interest rate earned?

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

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

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

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

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

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

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

When is the interest rate earned in simple interest?

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

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

<p>Inflation (C)</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) (D)</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 (D)</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 (A)</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 (A)</p> Signup and view all the answers

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

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

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

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

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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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