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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?

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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