Final answer:
To calculate the current value of a future amount, the compound interest formula is used, which accounts for interest on the initial principal and the accumulated interest over time. The future value is computed, and the original principal is subtracted from this to find the compound interest earned.
Step-by-step explanation:
To determine the current value of a desired amount in the future, one would use the formula for compound interest. Compound interest is the calculation of interest on both the initial principal and the accumulated interest from previous periods. The formula to calculate the future value is given by:
Future Value = Principal x (1 + interest rate)time
And to find the compound interest specifically, we subtract the original principal from the future value:
Compound interest = Future Value - Present Value
For example, applying this to a three-year scenario with a principal amount and a certain interest rate will show how much the initial investment grows thanks to the effect of compound interest.