Question

1. A small-scale businessman deposits money at the beginning of each year into his savings account, depending on the level of the business’ returns. He deposits $1000 in the first year, $3000 in the second year, $5000 in the third and $7000 in the fourth year and annual interest rate of 7%. What is the value of the investment at the time of his first deposit?

Answer 1

Answer:

The value of the investment at the time of his first deposit is $1,000.

At the end of the first year, the investment will be worth $1,070.

Explanation:

The value of a deposit investment is determined by the interest rate and time.  Time affects the value of an investment by this small-scale businessman in many ways.  The passage of time increases the value of his investment.  However, the total increase may not be due to the interest rate, but inflation also affects asset's value.  For this businessman to make a gain in the investment, the interest rate must be higher than the inflation rate.  Otherwise, the investment loses money due to the effects of inflation, which reduces the real value of an asset over time.