In order to determine the future value of some lump sum, we must use the process of ________.

Question

BlackTom AI · Accepted Answer

To project how much a lump sum will be worth in the future, we rely on the idea of growth through interest over time. Compounding is the process by which the interest earned on an initial amount (the principal) is added to the principal, so that in the next period, interest is earned on both the original amount and the accumulated interest.

This differs from simple interest, where interest is earned only on the initial principal each period and not on previously earned interest. The standard future value formula for compounding is FV = PV × (1 + i)^n, where PV is present value, i is the interest rate per period, and n is the number of periods.

In this question, since the goal is to determine the future value of a lump sum, the correct concept is compounding, which captures the growth of the investment over time due to interest on interest.

Note: there are no alternative options provided to compare against, so the explanation focuses on why compounding is the appropriate mechanism for calculating future value.

MSB-250-300-002 Topic 5 Quiz

In order to determine the future value of some lump sum, we must use the process of ________.

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MSB-250-300-002 Topic 5 Quiz

In order to determine the future value of some lump sum, we must use the process of ________.

View Explanation

Log in for full answers

Similar Questions

Part 1Consider a twominus−year ​investment: Given a constant and positive interest​ rate, the interest earned in the second year will be greater than the interest earned in the first year​ (assuming annual​ compounding). Part 1 True False

If Jack and Jill deposit $1,000 into a savings account that earns 4.5% annual interest (compounded monthly), how long will it take for their money to double to $2,000?

How much will you get back on a five year investment of $100 that pays 5% interest per year?

What is the effective yield (APY) if the Annual Percentage Rate (APR) is 7.64 percent and it is compounded quarterly?

If you deposit $10,000 in an account with an annual rate of 9% compounded semiannually, how long will it take for you to have $2,000,000 in the account?

With compound interest, the investor earns interest on the principal amount invested plus interest on accumulated interest. Which of the following compounding frequencies would yield the investor the greatest ending balance assuming all else is equal?

You have located an investment that pays 9 percent per year. You invest $800. How much will you have in seven years? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.Blank.xlsx

If you deposit $1'000 in a savings account that pays 4% compounded annually , compute the future value of your account after 4 years.

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Part 1Consider a twominus−year investment: Given a constant and positive interest rate, the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding). Part 1 True False