Question

Let's say a firm invests $45,000 today for 10 years at an interest rate of 5.6%. What will be the investment's future value 10 years from now assuming that the interest rate will compound annually? How will your answers change if the interest rate compounds semiannually?

Answer 1

Amount Invested Today = $45,000

a). Calculating the Future Value of Investment in 10 years if interest rate will compound annually:-

Where,

r = Interest rate = 5.6%

n= no of periods = 10 years

m = no of times compounding in a year = 1 (compounded annually)

Future Value = $77598.21

So, the investment's future value 10 years from now is $77,598.21

b). Calculating the Future Value of Investment in 10 years if interest rate will compound semi-annually:-

Where,

r = Interest rate = 5.6%

n= no of periods = 10 years

m = no of times compounding in a year = 2 (compounded semi-annually)

Future Value = $78,176.25

So, the investment's future value 10 years from now is $78,176.25