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FUNO_A03

The document discusses the concept of the time value of money, illustrating how compound interest affects the future value of an initial deposit over time. It includes tables showing interest earned on a $100 deposit at an 8% annual interest rate and future value interest factors for various interest rates. The document emphasizes that higher interest rates and longer investment periods lead to greater future values.

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Haider Jaffar
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7 views1 page

FUNO_A03

The document discusses the concept of the time value of money, illustrating how compound interest affects the future value of an initial deposit over time. It includes tables showing interest earned on a $100 deposit at an 8% annual interest rate and future value interest factors for various interest rates. The document emphasizes that higher interest rates and longer investment periods lead to greater future values.

Uploaded by

Haider Jaffar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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FUNO_C03.

qxd 9/19/08 16:49 Page 45

3 The Time Value of Money

Table 3.2 INTEREST EARNED


BEGINNING DURING PERIOD ENDING
Illustration of YEAR AMOUNT (8% of beginning amount) AMOUNT (FVn )
compound interest
with $100 initial 1 $100.00 $ 8.00 $108.00
deposit and 8% 2 108.00 8.64 116.64
annual interest rate 3 116.64 9.33 125.97
4 125.97 10.08 136.05
5 136.05 10.88 146.93
6 146.93 11.76 158.69
7 158.69 12.69 171.38
8 171.38 13.71 185.09
9 185.09 14.81 199.90
10 199.90 15.99 215.89

Table 3.3 (FVIFi,n) = (1 + i )n


Future value interest INTEREST RATE (i )
factor of $1 at i % at
PERIOD (n) 1% 3% 5% 8% 10% 15%
the end of n periods
(FVIFi,n ) 1 1.010 1.030 1.050 1.080 1.100 1.150
2 1.020 1.061 1.102 1.166 1.210 1.322
3 1.030 1.093 1.158 1.260 1.331 1.521
4 1.041 1.126 1.216 1.360 1.464 1.749
5 1.051 1.159 1.276 1.469 1.611 2.011
6 1.062 1.194 1.340 1.587 1.772 2.313
7 1.072 1.230 1.407 1.714 1.949 2.660
8 1.083 1.267 1.477 1.851 2.144 3.059
9 1.094 1.305 1.551 1.999 2.358 3.518
10 1.105 1.344 1.629 2.159 2.594 4.046
25 1.282 2.094 3.386 6.848 10.835 32.919
50 1.645 4.384 11.467 46.902 117.391 1,083.657

future value interest factor (or terminal value interest factor) tables, are designed to be used
with Eq. (3.5). Table 3.3 is one example covering various interest rates ranging from 1
to 15 percent. The Interest Rate (i) headings and Period (n) designations on the table are sim-
ilar to map coordinates. They help us locate the appropriate interest factor. For example,
the future value interest factor at 8 percent for nine years (FVIF8%,9) is located at the inter-
section of the 8% column with the 9-period row and equals 1.999. This 1.999 figure means
that $1 invested at 8 percent compound interest for nine years will return roughly $2 – con-
sisting of initial principal plus accumulated interest. (For a more complete table, see Table I
in the Appendix at the end of this book.)
If we take the FVIFs for $1 in the 8% column and multiply them by $100, we get figures
(aside from some rounding) that correspond to our calculations for $100 in the final column
of Table 3.2. Notice, too, that in rows corresponding to two or more years, the proportional
increase in future value becomes greater as the interest rate rises. A picture may help make this
point a little clearer. Therefore, in Figure 3.1 we graph the growth in future value for a $100
initial deposit with interest rates of 5, 10, and 15 percent. As can be seen from the graph, the
greater the interest rate, the steeper the growth curve by which future value increases. Also,
the greater the number of years during which compound interest can be earned, obviously the
greater the future value.

45

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