2
Example 1:
What is the future value of $800 at 6% compounded annually after 5 years?
(For Excel solution of all examples, please see Time Value of Money – Excel
file).
Here are what we have: PV=800, i=6%, n=5 years, FV? Using equation (1):
FV
5
=800*FVIF(6/1,5*1)=800*1.3382=$1070.56
Note: m =1 since annual compounding.
From Table Appendix A we look under
number of period 6, and 5% interest rate and we find the value of 1.3382.
Or:
FV
5
= 800 * (1 + .06)
5
= $1,070.56
(
mathematical form)
Example 2:
What is the value of $100 compounded quarterly at 8% after two years?
Here is what we have: PV=100, i=8%, m=4, n=2, FV?
FV
2
= $100*FVIF(8/4,2*4)=100*FVIF(2,8)=100*1.1717==$117.17
Note
: quarterly compounding, m=4. From Table Appendix A we look under number
of period 2, and 8% interest rate and we find the value of 1.1717.
Or:
FV
2
= 100* (1+ .02)
8
= $117.17
(
mathematical form)
Example 3:
You can deposit $9,000 in Victoria bank that pays 12 % interest compounded
monthly for 20 years or deposit the same $9,000 in Houston bank that pays 12 %
compounded annually for 20 years. 1) where should you deposit? 2) Estimate the
addition return of Victoria bank.
ANSWER:
1)
You should invest in Victoria bank since the more compounding the better for
investors.
2)
find the FV of a lump sum, we use:
FV = PV * (1+ i/m)
nm
In Victoria Bank, you will have:
FV = $9,000(1.01)
240
= $98,032.98
(i = 0.12, m=12, n=20)
In Houston Bank, you will have: