Our hundred dollars at ten percent per year for years the columns are the future values at the end of each year the green is our hundred-dollar principal the portion of the columns above this is the future value created the blue is the amount of future value created by simple interest accumulated over time the red is the amount of future value created by compound interest accumulated over time the yearly change the height of the column sis a dollar return over the year and it consists a simple interest and compound.

Interest in our example simple interest is contributing just ten dollars per year compounded interest is contributing and ever-increasing amount each year the contributions simple interest because relatively insignificant by comparisons graph illustrates compounding is the driving factor in the creation of future value let’s look at a numerical example suppose you invest seven thousand dollars in a five-year CD earning six percent per year how much would you have in five years we’ll solve this problem first using the mathematical equation and then we’ll solve it in Excel spreadsheet at time we invest seven thousand dollars.

At six percent per year want to know how much will have at the end of five years will solve this using the future value equation future value time t is equal to present value x plus the rate of return raise the teeth power is a total number of periods over which the investment is compounded and so the future value at the end of five years is equal to a present value of seven thousand dollars plus six percent rate of return raise the fifth power given nearly compounding compounding periods over five years doing the math our future value factor is . and our future value at the end of your is seven dollars and fifty eight cents so if you invest.

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