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# Time Value of Money: Future Valuation

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You hold \$2000 as a customer deposit, but the customer wants to make sure he does not loose on the opportunity cost of the dollars. You agree to pay the customer 10% interest during the holding period. At the end of 3 years you need to return the deposit and the interest to the customer. How much will you have to give the customer in 3 years?

#### Solution Preview

We would have to know and understand the type of interest we are paying in 3 years. If we are paying simple interest, then the calculation is:

\$2000 x 10% = \$200. So we would remit \$2000 + \$200 = \$2200.00 to the customer after the 3 year period is up.

If we are compounding the interest, then the calculation is \$2000 x 1.1 for the first year = \$2200.

For the second year the calculation is \$2200 x 1.1 = \$2420. For the third year, the calculation ...

#### Solution Summary

How to calculate simple and compound interest on a principal amount

\$2.19