What formula is used to calculate the future value of money?

What formula is used to calculate the future value of money?

• A. Pn = P0(1+r)^n
• B. Pn = P0(1-r)^n
• C. Pn = P0/(1+r)^n
• D. Pn = P0 + (r*n)

Answer: (A)

The formula used to calculate the future value of money is expressed as Pn = P0(1+r)^n. In this equation: - Pn represents the future value of the investment or cash flow at time n. - P0 is the present value or the initial amount of money invested or saved. - r is the interest rate per period, expressed as a decimal. - n is the number of periods the money is invested or compounded. This formula illustrates the concept of compound interest, where the initial investment grows over time not only based on the original amount but also on the interest that accumulates. Each period, the amount of interest is calculated on the new total, which includes previous interest earned, leading to exponential growth. This understanding of the compounding effect is fundamental in finance, as it emphasizes the importance of time and the interest rate on the growth of investments. The other options do not correctly represent the future value calculation or utilize incorrect mathematical relationships that do not reflect how compounding works in finance.

The formula used to calculate the future value of money is expressed as Pn = P0(1+r)^n. In this equation:

• Pn represents the future value of the investment or cash flow at time n.

• P0 is the present value or the initial amount of money invested or saved.

• r is the interest rate per period, expressed as a decimal.

• n is the number of periods the money is invested or compounded.

This formula illustrates the concept of compound interest, where the initial investment grows over time not only based on the original amount but also on the interest that accumulates. Each period, the amount of interest is calculated on the new total, which includes previous interest earned, leading to exponential growth.

This understanding of the compounding effect is fundamental in finance, as it emphasizes the importance of time and the interest rate on the growth of investments. The other options do not correctly represent the future value calculation or utilize incorrect mathematical relationships that do not reflect how compounding works in finance.