Question

The Smiths are saving money for a down payment on a house. The Smiths have $25,000 in cash and they estimate that in 5 years they will have approximately $31,000 if they deposit their cash in a savings account that compounds interest yearly. To calculate the $31,000 amount, the Smiths determined the:

A)net present value of the $25,000.
B)future value of the $25,000.
C)internal rate of the return on the $25,000.
D)present value of $25,000.

Answer 1

The Smiths determined the future value of their $25,000 which will be $31,000 in 5 years.

Step-by-step explanation:

To calculate the $31,000 amount, the Smiths determined the future value of the $25,000.

Future value (FV) is the value of an investment or cash flow at a specified date in the future, based on the assumption that the cash flow will compound with a certain interest rate. In this case, the Smiths estimated that their $25,000 will grow to $31,000 in 5 years if it is deposited in a savings account that compounds interest yearly.