Multiple Choice
What is the value in year 10 of a \$1,000 cash flow made in year 3 if interest rates are 9\% compounded annually?
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10. Time Value of Money
Time Value of Money Equations
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What is the future value of \$2,000 deposited for one year at an annual interest rate of 6% compounded once per year?
A
\$2,600
B
\$2,120
C
\$2,012
D
\$2,060
Verified step by step guidance1
Understand the formula for future value (FV) when interest is compounded annually: FV = P × (1 + r)^n, where P is the principal amount, r is the annual interest rate (in decimal form), and n is the number of years.
Identify the values given in the problem: P = \$2,000, r = 6% (convert to decimal: 0.06), and n = 1 year.
Substitute the values into the formula: FV = 2000 × (1 + 0.06)^1.
Simplify the expression inside the parentheses: (1 + 0.06) = 1.06.
Multiply the principal amount by the simplified value: FV = 2000 × 1.06. This will give the future value of the deposit after one year.
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