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What is the future value of $1.00 in three years at an interest rate of 6%?
A$1.19
B$1.12
C$1.06
D$0.84
Answer & Solution
Correct answer: A. $1.19
1. Future value multiplies the amount by one plus the interest rate, once for each year.
2. $1.00 times 1.06 gives $1.06 after one year.
3. $1.06 times 1.06 gives $1.12 after two years.
4. $1.12 times 1.06 gives $1.19 after three years.
5. Interest is earned on interest already earned, which is compounding.
6. Stopping at $1.12 counts only two years of compounding.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.8 Capital Investment Analysis_
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