If you are solving the following calculation in excel: I receive $1,000 today and I invest it, earning 10% per year, for 40 years, how much will it be worth in 40 years? What would you input in the Payment cell? a. $0 b. $1,000 c. 10% d. 40
The correct answer and explanation is:
Correct Answer: a. $0
Explanation (Excel Future Value Calculation – 300 Words)
To solve this problem in Excel, you would use the FV (Future Value) function. The scenario describes a single lump sum investment of $1,000, with no additional payments made over time, growing at 10% annual interest for 40 years.
FV Function Syntax:
=FV(rate, nper, pmt, [pv], [type])
- rate: The interest rate per period. In this case, it’s 10% (0.10).
- nper: Number of periods (years). In this case, 40.
- pmt: The payment made each period. Since there are no additional regular payments, this is $0.
- pv: Present value or the amount of money you invest today. It’s $1,000. This value is usually entered as negative to represent a cash outflow.
- type: Indicates when payments are due. Not needed here since pmt = 0.
Example Excel Formula:
=FV(0.10, 40, 0, -1000)
Answer in Excel:
This formula calculates how much $1,000 invested today at 10% annually will grow to in 40 years without any additional contributions. The output will be:
=FV(0.10, 40, 0, -1000) → $45,259.26
Why the Correct Answer is a. $0
The Payment (PMT) field in this case refers to recurring periodic payments, which do not occur here. You’re investing a one-time amount of $1,000 — not contributing monthly or yearly payments. Therefore, the payment input must be $0, since only the initial investment (PV) and interest rate (rate) drive the future value.
If you incorrectly enter $1,000 as a recurring payment, Excel would assume you’re adding that amount every year for 40 years, resulting in a much larger future value, which does not match the scenario.
Final Answer: a. $0