FV2 Future Value Example

Problem

What will 100,000 grow to be in 9 years if it is deposited today in an account with a nominal annual interest rate of 6% with monthly compounding of interest?

Solution

In this problem as the compounding is monthly, a period is defined as being one month. All values need to be stated in relation to that period length. The term 9 years becomes 9 x 12 = 108 periods, and the annual discount rate 6% becomes a period discount rate of 6% / 12 = 0.5%.

The amount of 100,000 (PV) is invested now at the start of period 1, and needs to be compounded forward 108 periods (n) to the end of period 108, at a discount rate of 0.5% (i).

This problem is solved using the future value of a lump sum formula as follows.

PV = 100,000
n = 108
i = 0.5%
FV = PV x (1 + i)n
FV = 100,000 x (1 + 0.5%)108
FV = 171,369.95

Explanation

The amount of 100,000 invested today in an account earning 8% compound interest, will grow in to an amount of 309,440.09 in 6 years time.

The amount of 100,000 invested today in an account earning a nominal annual interest rate of 6% compounded every month, will grow into an amount of 171,369.95 in 9 years time.

FV2 Future Value Examples

This is one of many time value of money examples, discover another at the links below.

FV2 Future Value Example April 21st, 2018Team

You May Also Like