2.2. Future Value & Compounding

Question 1

Future value…

Answer 1

Future value = present value * (1+r)^n.

or Future value = present value * FVIF(r,n).

Question 2

Future value…

Answer 2

Needs a return on investment (discount / interest rate) and the time scale.

Question 3

Calculate the return on investment (future value calculation) on a £100 investment that yields £180 five years later…

Answer 3

FV = PV * (1+r)^n

£180 = £100 * (1+r)^5
(/100)
1.80=(1+r)^5
root to the power of 5

1.124746113

-1 = 0.124746113 = 12.5%.

Question 4

Calculate the time scale on an investment (future value calculation) £100 in 2023, expected to rise to £290, paying 8.34%.

Answer 4

£290 = £100 * (1+0.0834)^n
(/100)
2.90=1.0834^n
ln(2.90)/ln(1.0834)=n
n=13.2915646 = 14 whole years.