Page 261 - BA2 Integrated Workbook STUDENT 2018
P. 261
Long-term decision making
Time value of money
Money received today is worth more than the same sum received in
the future, i.e. it has a time value.
3.1 Compounding
A sum invested today will earn interest. Compounding calculates the future value of a
given sum invested today for a number of years.
Present value Future value
Formula for compounding:
V = Future value
n
V = X(1+r)
X = Initial investment (present value)
r = Interest rate
n = number of years
How much would $2,000 invested at 6% be worth at the end of 4 years?
4
V = 2,000 (1 +0.06) = $2,524.95
Illustrations and further practice
Now try TYU 5
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