3. Future value Aa Aa The principal of the time value of money is probably the singla most important concept in financial management. One of the most frequently encountered applications involves the celculation of a future value. The process for converting present values into future values is called compoundingThis pracess requires knowledge of the values of three of four time-valuc-of-money variables. Which of the fallowing is not one of thesc variables? The inflation rate indicating the change in average prices O The present value (PV) of the amount invested The duration of the investment (N) The interest rate (1) that could be carned by invested funds All other things being equal, the numerical difference between a present and a future value corresponds to the mount of interest earned during the deposit or investment period. Each line on the following graph corresponds to an interest rate: 0%, 9%, or 17%. Identify the interest rate that corresponds with each line. AILUE IDolars TIME IYears Line A: Line B: Line C Investments and loans base their interest calculations on one of two possible methods: the simple interest and the compound 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 bwo 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 (FV) using: Compcund interest? Simple interest? FV-PV x (1 I) Identify whether the following statements about the simple and compound interest methods are true cr false Statement True False All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based cn simple interest The process of eaming compound interest allows a depositor or investor to earn interest on any interest earned in prier pariods. Elizabeth is willing to invest $30,000 for three years, and is an economically rational investor. She has identified three investment alternatives (L, M, and P) that vary in their method of calculating interest and in the annual interest rate offered. Since she can only make one investment during the three-year investment period, complete the following table and indicate whether Elizabeth should invest in each of the investments. Note: When calculating each investment's future value, assume that all interest is earned annually. The final value should be rounded to the nearest whole dollar. Make this Investment Interest Rate and Method Expected Future Value Yes No 5% compound interest 4% sample interest 7% compound interest
