2. Future Value

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. The process for converting present values into future values is called discounting . This process requires knowledge of the values of three of four time-value-of-money variables. Which of the following is not one of these variables? The inflation rate indicating the change in average prices The interest rate (1) that could be earned by invested funds The present value (PV) of the amount invested The duration of the investment (N) 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%, 11%, or 22%. Identify the interest rate that corresponds with each line. VALUE IDollars arch VALUE (Dollars) 0 1 2 3 4 5 6 7 9 8 TIME (Years) Line A: Line B: Line : Investments and loans base their interest calculations on one of two possible methods: the interest and the interest methods. Both methods apply three variables--the amount of principal, the interest rate, and the investment or deposit period-to the amount deposited or invested in order to compute the amount of interest. However, the two methods differ in their relationship between the variables. Assume that the variables I, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. Which equation best represents the calculation of a future value o BMW