Chapter 9, Problem 1DQ

Summary Introduction

To explain:Relation of the future value with the present value of a single sum.

Introduction:

Future Value:

The value of an investment or an asset in the future time period is termed as future value. It is calculated by multiplying the present value of the investment or asset with its growth rate.

Present value:

The current value of an investment or an asset is termed as its present value. It is calculated by discounting the future value of the investment or asset.

Answer to Problem 1DQ

The future value of a single sum provides the estimated worth of the amount while the present value of a single sum provides the current worth of the amount.

Explanation of Solution

The future value provides information about the estimated or expected worth of a single amount. The formula for the calculation of future value is as follows:

$\text{Future Value}=\text{Present Value}\times {\left(1+\text{Interest Rate}\right)}^{\text{Time Period}}$

The present value provides information of the current worth of a single amount. The formula for the calculation of present value is as follows:

$\text{Present Value}=\frac{\text{Future Value}}{{\left(1+\text{Interest Rate}\right)}^{\text{Time Period}}}$