3. Future Value (of an investment)
The future value of money is the amount that it will grow to after a specified time in the future. In the previous example, the future value of $10,000 after 1 year is $10,450. In the 2nd year, the future value is $10,920.25. In the 3rd year, the future value is $11,411.66. Let's say we want to get $10,000 after 3 years (future value). Assuming that the interest rate is still 4.5%, the money that we should have right now (present value) should be $8,762.97. We can see this in the following computations:
After 1st year: $8,762.97 + 4.5% = $9,157.30
After 2nd year: $9,157.30 + 4.5% = $9,569.38
After 3rd year: $9,569.38 + 4.5% = $10,000
This further illustrates the fact that the same $10,000 in the future (3 years from now) is only worth $8,762.97 in the present (Croome 2003).
4. Opportunity cost
Opportunity cost is the economic value that is lost when an alternative choice is made. For example, let's say that you have two choices where you can invest your money. The first one is at a bank that gives 5% per year, while the second one is through bonds that give 8% per year. If you choose the first option (bank), you would have lost 8% - 5% = 3% or $30 since you could have received more if you chose the second option...
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