Example: Equivalence Calculations - Time Valued of Money.

If  $500 were deposited in a bank savings account,how muchwould be in the account three years hence if the bank paid 6% interest compounrted anually?

We can draw a diagramof the problem. [Note:To have a consistent notation, we will represent receipts by upward arrows (and positive signs), and disbursements (or payments) will have downward arrows (and negative signs).]

SOLUTION

From the view point of the person depositing the $500, the diagram for "today" (Time=0) through
Year 3 is as follows:

Weneed to identify the various elementsof the equation.The present sum P is $500.The interest rate per interest period is 6%, and in 3 years there are three interest periods. The future sum F is to be computed from the formula