Question

Suppose an individual's retirement account with a balance of $165,000 is transferred to a new investment plan that pays 8% interest compounded annually. How much will the account be worth after 3 years? (Remember, the formula is A = P(1 + r)t.) A. $207,852 B. $224,481 C. $209,017 D. $192,456

Suppose your parents decide to invest $5,000 in gold. Their financial advisor anticipates that the value of gold will increase 17% every year for the next 15 years. How much would their investment be worth after 15 years? (Remember, the formula is A = P(1 + r)t.) A. $53,806
B. $61,652
C. $87,750
D. $52,694

Answer 1

• First: A
• Second: C

Explanation:

Remark

If this compounds, it means that the interest of the second year has the interest of the first year added to the principle. So if you gain 50 dollars as interest in the first year and the base amount was 1000 dollars, the second year will be taken as 1050 and you will find the interest on that.

Formula

Your formula should be A = P(1 + r)^t

Givens

• A = ??
• P = 165,000
• r = 8% = 8/100 = 0.08
• t = 3 years

Solution

• A = 165000*(1 + 0.08)^3
• A = 165000*(1.08)^3
• A = 165000*1.259712
• A = $207852

Answer: A

Problem 2

Givens

• P = 5000
• i = 17% = 17/100 = 0.17
• t = 15 years
• A = ?

Formula

A = P (1 + r)*t This is not compounded

Solution

A = 5000*(1 + 0.17)*15

A = [5000*1.17]*15

A = 5850 * 15

A = $87750

Answer C