Assume that the variables I, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. Which equation best represents the calculation of a future value (FV) using: Compound interest? FV = (1 + I)NN / PV FV = PV / (1 + I)NN FV = PV x (1 + I)NN B. Simple interest? FV = PV + (PV x I x N) FV = PV - (PV x I x N) FV = PV / (PV x I x N) C. Identify whether the following statements about the simple and compound interest methods are true or false. Statement True False After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based on simple interest. All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest. All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year. D. Alek is willing to invest $30,000 for eight years, and is an economically rational investor. He has identified three investment alternatives (A, B, and C) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the eight-year investment period, complete the following table and indicate whether Alek should invest in each of the investments. Note: When calculating each investment’s future value, assume that all interest is earned annually. The final value should be rounded to the nearest whole dollar. Investment Interest Rate and Method Expected Future Value Make this investment? A 9% simple interest B 4% compound interest C 6% compound interest

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter4: Time Value Of Money

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Question

A. Assume that the variables I, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. Which equation best represents the calculation of a future value (FV) using:

Compound interest?

FV = (1 + I)NN / PV

FV = PV / (1 + I)NN

FV = PV x (1 + I)NN

B. Simple interest?

FV = PV + (PV x I x N)

FV = PV - (PV x I x N)

FV = PV / (PV x I x N)

C. Identify whether the following statements about the simple and compound interest methods are true or false.

Statement	True	False
After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based on simple interest.
All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest.
All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year.

D. Alek is willing to invest $30,000 for eight years, and is an economically rational investor. He has identified three investment alternatives (A, B, and C) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the eight-year investment period, complete the following table and indicate whether Alek should invest in each of the investments.

Note: When calculating each investment’s future value, assume that all interest is earned annually. The final value should be rounded to the nearest whole dollar.

Investment	Interest Rate and Method	Expected Future Value	Make this investment?
A	9% simple interest
B	4% compound interest
C	6% compound interest

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.