Future Value of Single Cash Flow for Multiple Period Investment with Simple Interest

Future Value of Single Cash Flow for Multiple Period Investment with Simple Interest

 

Future Value with a Single Cash Flow:

Time value of money for a single cash flow is a cash inflow or outflow that investors or lenders received from or paid to once respectively for specific periods.

Future value (FV) refers to the amount of money an investment or present value (PV) will grow for specific periods of time at specific interest rate.

Future Value = Present Value + all earned interests

Multiple-Period Investment:

Multiple-period investment may be investment for more than one year. Term multiple-period can refer to more than one day or one month investment, so it isn’t always more than one year investment.

If period investments are based on one day, one month or one year etc., so discount rates are based on one day, one month or one year respectively.

Definition of Simple Interest:

 Simple interest means the interest is not reinvested, so interest is earned each period only on the original present value or principal.

Formula of simple interest future value for Multiple-Period Investment:

Which So FV= PV x ( 1 + rt) 

PV: Present Value or principal is worth today

FV: Future value is worth in the future

r : Interest rate, rate of return, or discount rate per period , but not always one year.

t : time is referred to number of periods of investment

Question

 Mr.A lends Mr.B $2,000 at interest rate of 14% per year, and borrowing is simple interest for 3 years. How much will Mr.A have in 3 years? And interest earned?

Solution

 FV=PVx(1+rt)

FV=$2,000 x (1+14% x 3)=$2,840

Interest = FV – PV = $2,840 – $2,000=$840.