Associate Safety Professional Practice Exam

Which formula correctly calculates the future value of money based on present value and interest?

1. F = P(1+i)^n

2. A = F(i)

3. P = A((1+i)^n - 1) / I(1+i)^n

4. A = P(1 - (1+i)^-n)

The correct answer is: F = P(1+i)^n

The formula that accurately calculates the future value of money based on the present value and the interest rate is represented by F = P(1+i)^n. In this formula, F stands for the future value, P represents the present value, i signifies the interest rate per period, and n indicates the number of periods. The logic behind this equation is rooted in the concept of compound interest, which is essential in finance. The formula demonstrates how the money invested today (present value) will grow over time at a specific rate of interest. When you multiply the present value by (1 + i) raised to the power of n, you are essentially applying the compound interest effect over n periods. Each year (or period), the investment earns interest not only on the initial principal but also on the interest that accumulates in previous periods, which leads to exponential growth in the value of the investment. This is a fundamental principle in finance used for projecting how much money will grow over time when invested. Other options, while they each have their respective contexts in finance, do not provide the straightforward calculation of future value based on present value in conjunction with interest and time.