Use the formula - FV / (1+r) ^n ... make up a scenario of a particular asset or investment and describe how it would be valued. How much more would it be worth in a particular amount of time?

Question

Business

Linda Morton

12 February, 02:39

Use the formula - FV / (1+r) ^n ... make up a scenario of a particular asset or investment and describe how it would be valued. How much more would it be worth in a particular amount of time?

+1

Answers (1)

Know the Answer?

Ramiro Fleming · Answer 1

See below

Explanation:

The formula in reference is a re-arrangement of the compound interest rate formula. The compound rate formula is used to calculate the future balance of a compound interest-earning account.

This particular formula is worked backward to calculate how much investment is needed to achieve a set goal.

For example, you desire to have $5000 in your account after six years. The bank pays an interest rate of 5%, how much must you save today to achieve your target?

Today amount will be the PV

FV = $5000

r=5%

n = 6years

PV = $5000 / (1+5/100) 6

PV=$5000 / (1+0.05) 6

pv = 5000/1.340095

pv=3,731.10

Meaning $3.731.10 will grow to $5000 after six years when invested in an account earning 5% compound interest.