From the future value
table, you will notice that $1 invested
at 12% interest for 5 years (assuming annual compounding)
becomes $1.7623. How much would you have in your
bank account if you had deposited $100 and waited
25 years, assuming the account pays 8% interest
compounded annually? Answer: $684.85 (the power
of compounding!)
From the present
value table, you will notice that $1
in 15 years has a value today of only $0.2394,
assuming the interest rate is 10%. That is, $0.2394
(24 cents) invested for 15 years at an annual
compound interest of 10% will grow to $1.00 after
15 years. |
**Example:**
It is 1889 and you have come into a nice inheritance
from your great aunt. You consider traveling to
Paris and looking into the new "impressionistic"
art scene - which you have heard is quite interesting.
Your trip would cost $400 and you would have
$100 to buy a painting. Somebody mentions there
is a colorful painting of irises by an obscure,
apparently mentally unstable artist who lives
in Arles. Or you could stay home and invest your
$500 in the booming market in railroad stocks.
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