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 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 duration of the deposit (N) The present value (PV) of the amount deposited The trend between the present and future values of an investment The interest rate (1) that could be earned by deposited funds Al 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. Eachine on the following graph corresponds to an interest rate: 0 9 1 7 . Identify the interest rate that corresponds with eachine Line : Une : Une Investments and loans base the interest calculations on one of two possible methods the interest and interest methods. Both methods apply three variables the amount of principal, the interest rate, and the investment or de period to the amount deposited or invested in order to compute the amount of interest. However, the two methods Mer in their relationship between the variables Assume that the variables and represent the interest rate investment or de period, and present value of the amount deposited invested, respectively. Which o tion best represents the calculation of a future (PV) using Compound interest Simple interest Assume that the variables I, N. and PV represent the interest rate, investment or deposit period, and present value posited or invested, respectively. Which equation best represents the calculation of a future value (FV) using: Compound Interest? Simple interest? OPVPV + (PVxIxN) OFV = PV + (PV XIXN) O PV-PVX (1+1) PV = PV / (1xIxN) OPPV / 1+1) OFV = PVxIxN Identify whether the following statements about the simple and compound Interest methods are true or false. True False Statement All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of Interest as an account earning compound interest The process of earning compound interest allows a depositor or investor to earn interest on any interest earned in prior periods. After the end of the second year and all other factors remaining equal, a future value based on compound interest will exceed a future value based on simple interest. Dimitri is willing to invest $30,000 for eight years, and is an economically rational investor. He has identified three investment alternatives (A, B, and C) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the eight-year investment period, complete the following table and indicate whether Dimitri 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 Expected Future Value Yes Investment Interest Rate and Method 10% simple interest 6% compound interest 7% compound interest olo o
