Question

If a capital sum of money P is placed on compound interest at a rate I compounded annually, show that the future sum of the F, after the number of interest periods n could be expressed as:

1. If a sum of £25,000 is invested at the interest rate of 8 percent per year for 10 years. How much will the investor receive at the end of investment.
2. To receive £10,000 in the future 20 years from now, how much should I deposit today at 10 percent interest per year

Answer 1

i)

Here,
P = 25,000
I = 8% or 0.08
n = 10 years

To find F

We can use the future value formula to find F

Substituting the values in the formula, we get:

Therefore, the investor will receive £53,973.12 at the end of the investment period.

ii)

Here,
F = 10,000
I = 10% or 0.10
n = 20 years

To find P

We can use the same formula.

or

Substituting the values in the formula, we get:

That means to receive £10,000 in the future 20 years from now at 10 percent interest per year, you have to invest £1,486.44 now.