The principal of the time value of money is probably the single most important concept in financial management. One of the most frequently encountered applications involves the calculation of a future value.

The process for converting present values into future values is called_______ .This process requires knowledge of the values of three of four time-value-of-money variables. Which of the following is not one of these variables?

a. The interest rate (I) that could be earned by deposited funds
b. The duration of the deposit (N)
c. The trend between the present and future values of an investment
d. The present value (PV) of the amount deposited

Time value of money recognizes the fact that today's $100 receipts are better than $100 receipts one year hence. The concept points towards inflation due to which money gradually loses its worth and value.

Future value refers to present value of an amount deposited today at r% rate of compounded interest for n periods.

It is expressed as:

[tex]FV = PV (1\ +\ R)^{n}[/tex]

The above process of converting present value into future value is referred to as compounding.

The variables required for above computation of future value being,

Present Value of the amount deposited denoted as PV

The interest rate (I) that would be earned on deposited funds i.e r

The time period of deposit i.e n