Economics Time Value Of Money Questions Long
The formula for calculating the future value of a single cash flow is given by:
FV = PV * (1 + r)^n
Where:
FV = Future Value
PV = Present Value (or the initial amount of money)
r = Interest rate (expressed as a decimal)
n = Number of periods (or the length of time the money is invested for)
This formula is based on the concept of compounding, which means that the value of money increases over time due to the interest earned. The formula calculates the future value by multiplying the present value by the factor (1 + r)^n, where (1 + r) represents the growth factor and n represents the number of periods the money is invested for.
For example, let's say you have $1,000 as the present value, an interest rate of 5% per year, and you plan to invest the money for 3 years. Using the formula, the future value would be:
FV = $1,000 * (1 + 0.05)^3
FV = $1,000 * (1.05)^3
FV = $1,000 * 1.157625
FV = $1,157.63
Therefore, the future value of the $1,000 investment after 3 years at a 5% interest rate would be $1,157.63.