Question

One of the most elementary time value of money formulas appears below.
FV = PV(1 + r)^t
Explain this equation so that a non-accountant can understand what is happening. Include in your explanation, an example covering more than one period.

Answer 1

FV = PV*(1+r)^t.

This formula helps us in knowing the amount of money to be earned by depositing a certain sum of money for a specified period at a given rate of interest.

FV = Future value of the amount deposited (or amount that the present deposit will grow into).

PV = value of the money deposited.

r = rate of interest compounded per period.

t is the number of periods.

For example if we want to know how much a deposit of $100 today will grow after 10 years when the stated interest is 10% compounded annually.

here,

FV is to be found out.

PV = $100

r =10% per year.=>0.10.

t =10 years.

so ,

FV = $100*(1.10)^10

=>$100*2.59374246

=>$259.37.

So the said deposit of $100 will grow to $259.37 in 10 years, when compounded @10% per year.