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2. Future value The principle 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. occurs when interest is camned on prior periods interest Which of the following is not one of these varlabies? The duration of the investment (n) The Inflation rate Indicating the change in average prices The interest rate (t) that could be earned by invested funds The present value (PV) of the amount invested All other things being equal, the numerical difference between a present and a future value corresponds to the amount of interest and during the deposit or investment period. Each line on the following graph corresponds to an interest rate 0%, 8%, o 17% A 20000 15000 DOLLARS (PV) 10000 S000 3 7 0 10 TIME (periods) Line A corresponds to while Line B is consistent with Line C corresponds to Investments and loans base their interest calculations on one of two possible methods: the interest and the 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 two methods differ in their relationship between the variables, Assume that the variables, 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 simple interest? OFV = 1:00 PV FV = PV + (PV XTXT) FV = PV XIX OFV = PV X (PV XIX) Which equation best represents the calculation of a future value (FV) using compound Interest? PV FV = der FV = PV + (PV XTXn) . PV FV = FV = PV X (1+1)" Identify whether the following statements about the simple and compound interest methods are true or false. True False 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 on simple interest 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. All other factors being equal, when interest is paid annually, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year, Identify whether the following statements about the simple and compound Interest methods are true or false. True False 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 on simple interest. 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 All other factors being equal, when interest is paid annually, both the simple interest and the compound Interest methods will becrue the same amount of earned interest by the end of the first year. Clancy is willing to invest $10,000 for four years, and is an economically rational investor. He has identined three investment alternatives (X, Y, and Z) that way in their method of calculating interest and in the annual interest rate offered Since he can only make one investment dining the four year investment period, complete the following table and indicate whether Clancy should invest in each of the investments Note: When calculating each Investment's future value, assume that all interest is compounded annually. The final value should be rounded to the nearest whole dollar Expected future value Make this investment? Investment X Interest rate and Method 8% compound interest 10% compound interest 10% simple interest Y Z

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