Assume the Original Equity investment was $1,000,000. If the stock market rate of return was estimated to be 10%, what should have been the total future value of the $1,000,000 inv... Assume the Original Equity investment was $1,000,000. If the stock market rate of return was estimated to be 10%, what should have been the total future value of the $1,000,000 invested in the stock market? Additionally, in Chicago, which scenario best illustrates the use of money as a unit of account?
Understand the Problem
The question is asking to analyze an investment scenario based on the rate of return to determine the future value of an investment, and to identify a scenario illustrating money as a unit of account.
Answer
The total future value of the investment is $1,100,000.
Answer for screen readers
The total future value of the investment is $1,100,000.
Steps to Solve
- Calculate Future Value of Investment
To find the future value of an investment, use the formula:
$$ FV = P(1 + r)^n $$
where:
- $FV$ is the future value,
- $P$ is the principal amount (initial investment),
- $r$ is the rate of return (as a decimal),
- $n$ is the number of years the money is invested.
In this case, the investment is $1,000,000, the rate of return is 10% (or 0.10), and we will assume it is for 1 year.
- Insert Values into the Formula
Insert the values into the formula:
$$ FV = 1,000,000(1 + 0.10)^1 $$
- Calculate the Future Value
Now perform the calculation:
$$ FV = 1,000,000(1.10) = 1,100,000 $$
Thus, the total future value of the $1,000,000 invested in the stock market at a 10% return after one year would be $1,100,000.
The total future value of the investment is $1,100,000.
More Information
This calculation illustrates the concept of compound interest, where the money grows based on the initial amount and the interest rate applied over time. The assumption of one year is common when not specified.
Tips
- Ignoring Time Period: Make sure to consider the number of years the investment is held. If the time isn't specified, it's typically safe to assume one year, but always check context.
- Using Percentage Incorrectly: Remember to convert percentage rates to decimals (10% becomes 0.10) when calculating.
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