13. The Financial System

How do you calculate present value and future value?

You are saving up \$12,000 for a luxurious European vacation two years from now. How much money would you need to invest today at Clutch Bank, earning their juicy 10% annual interest, to have enough for your vacation?

Using a little bit of algebra, we can rearrange the time value of money formula:

$FV=PV\cdot {(1+r)}^n$

The formula $PV=\frac{FV}{{(1+r)}^n}$ is best used for: 

You invest \$4,545 in Clutch Bank today earning a juicy 10% annual interest. What is the value of your investment in one year? What is the value of the investment after two years?

You are saving up \$12,000 for a luxurious European vacation two years from now. How much money would you need to invest today at Clutch Bank, earning their juicy 10% annual interest, to have enough for your vacation? How much would you need to invest today, if instead you could only earn 6% interest?