Geoscience Reference
In-Depth Information
Note:
The higher the interest rate (
i
) earned by the investment, the lower the present value will be
because the investment compounds at a higher rate. The longer the term of the investment (
n
),
the lower the present value will be because the investment compounds over a longer time.
10.7 FUTURE VALUE OF A PRESENT AMOUNT
The future value of an amount of money is the equivalent of either a single amount today (the
present amount) or series of amounts to be received or paid annually over a period of years as com-
pounded at an interest rate over a period of years. The future value can be calculated from either a
single present amount (
P
) or an annual amount (
A
). The future value (
F
) of a present dollar amount
can be calculated by using Equation 10.6. The equation compounds the interest in dollars (
i
) at
which the present value (
P
) is invested over the term of the investment in years (
n
).
FP i
n
=+
(
1
)
(10.6)
■
EXAMPLE 10.6
Problem:
If $6000 is invested for 5 years at 6% interest per year, what will the investment be worth
in 5 years?
Solution:
FP i
n
=+
(
1
)
5
=
$
6000 1006
(
+
.)
5
=
$
6000 106
( .)
=
$
6000
((.
1 338
)
=
$
8029
The $6000 investment will be worth $8029 in 5 years.
Note:
The higher the interest rate (
i
) earned by the investment, the higher the future value will be
because the investment compounds at a higher rate. The longer the term of the investment
(
n
), the higher the future value will be because the investment compounds for a longer time.
REFERENCES AND RECOMMENDED READING
Blank, L.T. and Tarquin, A.J. (1997).
Engineering Economy
. McGraw-Hill, New York.
Elkington, J. (1997).
Cannibals with Forks
. Capstone Publishing, Oxford, U.K.
National Bureau of Economic Research. (2013).
NBER Working Group Descriptions: Environmental
Economics
, http://www.nber.org/programs/eee/ee_oldworkinggroup_directory/ee.html.
Thuesen, H.G., Fabrycky, W.J., and Thuesen, G.J. (1971).
Engineering Economy
, 4th ed. Prentice-Hall,
Englewood Cliffs, NJ.
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