Question

The value of a collector's item is expected to increase exponentially each year. The item is purchased for $500 and its value increases at a rate of 5% per year. Find the value of the item after 4 years. $578.81 $607.75 $1687.50 $2531.25

Answer 1

Answer: $607.75

Explanation:

Answer:

$607.75

Explanation:

As a first approximation, compound interest will be slightly higher than simple interest for a relatively short time period. Here simple interest at 5% for 4 years will add 4×5% = 20% to the value, adding about $100 to the initial $500 value. That is, we expect the value in 4 years to be slightly more than $600.

The appropriate answer choice is $607.75.

_____

The actual amount can be calculated using the multiplier 1.05 for each of the 4 years, or 1.05^4 ≈ 1.21550625 for the entire period. Then the predicted item value is ...

$500 × 1.21550625 = $607.753125 ≈ $607.75

Answer 2

$607.75

Explanation:

As a first approximation, compound interest will be slightly higher than simple interest for a relatively short time period. Here simple interest at 5% for 4 years will add 4×5% = 20% to the value, adding about $100 to the initial $500 value. That is, we expect the value in 4 years to be slightly more than $600.

The appropriate answer choice is $607.75.

_____

The actual amount can be calculated using the multiplier 1.05 for each of the 4 years, or 1.05^4 ≈ 1.21550625 for the entire period. Then the predicted item value is ...

$500 × 1.21550625 = $607.753125 ≈ $607.75