The future value of an investment refers to how much the investment will be valued in the future. Money today will be worth more in the future because money loses value through inflation over time. So, when you invest money in the bank you get interest to cover for the value lost. Instead of keeping money under the mattress, you save it in the bank or invest in an interest-earning account.
Question: Mary Invested Ksh 50,000 at a compound interest of 9% per annum. Calculate its future value after 25 years.
Answer:
The formula for calculating the future value of an investment with compound interest is:
For the case of Mary’s investment,
P = 50,000
r = 0.09
n = 1 (compounded annually)
t = 25 years
Thus, future value of the investment is calculated as:
A = 50,000 × [1 + (0.09/1)]1×25
A = 50,000 × 1.0925
A = 50,000*8.623
A = 431,150
Therefore, the future value of Mary’s investment after 25 years is 431,150.
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