Archive / Investment Adviser (Level 1) / Time Value of Money
nism-series-xa-future-value-lumpsum-compound-interest[ INVESTMENT ADVISER (LEVEL 1) ]
What is the future value of Rs. 1,00,000 invested today for 5 years at an annual compound interest rate of 10%?
[ A ]Rs. 1,61,051[ CORRECT ]
[ B ]Rs. 1,50,000
[ C ]Rs. 1,10,000
[ D ]Rs. 2,00,000
Takeaway
Option A is correct: Rs. 1,61,051.
Derivation
Future Value is computed as FV = PV × (1 + r)^n. Substituting the given values: FV = 1,00,000 × (1.10)^5 = 1,00,000 × 1.61051 = Rs. 1,61,051. The key distinction tested here is compound growth versus simple growth — compounding applies the interest rate to an already-grown base each year, which is why the 5-year result (Rs. 1,61,051) exceeds the simple-interest figure of Rs. 1,50,000 (10% × 5 years added directly to principal).
Why the others fail
B — Rs. 1,50,000
Rs. 1,50,000 results from applying simple interest (10% × 5 years = 50%) instead of compounding the return annually.
C — Rs. 1,10,000
Rs. 1,10,000 reflects only a single year's growth at 10%, not the full 5-year compounding period.
D — Rs. 2,00,000
Rs. 2,00,000 overstates the correct future value and does not correspond to compounding Rs. 1,00,000 at 10% for 5 years.