Final answer:
The process of determining the future value of an amount invested today is known as a compounding problem, particularly when applying a 15% interest rate over a period of 5 years.
Step-by-step explanation:
Certainly! When determining what an amount invested today will be worth in the future, you are dealing with the concept of "future value."
The future value is the value of an investment at a specified date in the future, assuming a certain rate of return or interest rate.
Here's a detailed explanation:
Present Value (PV): This is the initial amount of money that is invested or borrowed. In your case, it's the amount invested today.
Interest Rate (r): This is the rate at which the invested amount grows over time. It could be an annual interest rate or a compounding rate.
Time (t): This is the number of periods for which the investment is held. In your question, it's the time period of 5 years.
The future value (FV) can be calculated using the formula:
FV=PV×(1+r)t
This formula accounts for the compounding effect, where interest is earned on both the initial principal and the accumulated interest from previous periods.
So, when you're determining what an amount invested today will be worth in 5 years, you are essentially solving a future value problem. You input the present value, the interest rate, and the time period into the formula to find out the future worth of the investment.