Question

terry invests a sum of money at a rate of 3.7% p.a. compound annually. After 4 years he withdraws $2000, and moves the moves the remaining money into an account earning 4.5% p.a. compounded annually. After 3 more years, there is $5635.66 in the account. How much did terry initially invest?

Answer 1

To solve it, you need to use compound interest. Let me show you how.

Let P be the initial amount that Terry invested. Then after 4 years, the amount in the account is:

P × (1 + 0.037)^4

After withdrawing $2000, the remaining amount is:

P × (1 + 0.037)^4 - 2000

This amount is then moved to another account earning 4.5% p.a. compounded annually. After 3 more years, the amount in the account is:

(P × (1 + 0.037)^4 - 2000) × (1 + 0.045)^3

We are given that this amount is equal to $5635.66. So we can write an equation:

(P × (1 + 0.037)^4 - 2000) × (1 + 0.045)^3 = 5635.66

Simplifying the equation, we get:

P × 1.1597 - 2000 = 5635.66 / 1.1406

Adding 2000 to both sides, we get:

P × 1.1597 = 5635.66 / 1.1406 + 2000

Dividing both sides by 1.1597, we get:

P = (5635.66 / 1.1406 + 2000) / 1.1597

Using a calculator, we get:

P ≈ 5000.01

Therefore, Terry initially invested about $5000.01.

Explanation: