Final answer:
Compound interest is essential for accurately assessing long-term investments due to its dramatic impact on the growth of savings over time.
Step-by-step explanation:
True, compound interest must be used to properly evaluate long-term investment proposals. Compound interest is the accumulation of interest on the principal plus the previously earned interest. This type of interest calculation has a significant effect on the growth of investments over time.
The formula to compute future value with compound interest is: Future Value = Principal x (1 + interest rate)time. Compound interest can therefore be calculated as the difference between the future value and the present value.
For instance, saving $3,000 at a 7% annual rate of return for 40 years will result in nearly fifteen times the original amount, underscoring the power of compound growth rates.
For example, if you invest $1,000 with a 5% interest rate compounded annually, after 10 years, the future value of your investment would be $1,628.89. This is because the interest is added to the principal amount each year, leading to exponential growth over time.
Using compound interest calculations allows investors to make more accurate projections and assess the potential returns of long-term investments.