Question

Precision engineering invested $125,000 at 6 percent interest, compounded annually for 3 years. how much interest on interest did the company earn over this period of time?

Answer 1

The future amount of the current investment/credit with interest that is compounded annually can be calculated through the equation,
F = P x (1 + r)^n
where F is the future amount, P is the principal, r is the decimal equivalent of the given rate, and n is the number of years.
Substituting the known values,
F = ($125,000) x (1 + 0.06)^3 = $148,877
The interest is therefore,
I = $148,877 - $125,000 = $23,877