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Investment note

by rahulvsd » Mon Mar 12, 2012 9:15 am
A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price?

Choices
A $6000
B $6048
C $6100
D $6150
E $6200

[spoiler]OA: A. Could you explain with steps please.[/spoiler]
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by Jim@StratusPrep » Mon Mar 12, 2012 7:06 pm
OP = Original purchase
SP = Sale price

SP = OP(1.1)(1.05) - 500

6430 = OP(1.1)(1.05) - 500

6930 = OP (1.1)(1.05) --> change this to fractions for easier math OP (11/10)(21/20)

(10/11)(20/21) 6930 = OP

(10/11)6600 = OP

6000 = OP
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by Anurag@Gurome » Mon Mar 12, 2012 7:09 pm
rahulvsd wrote:A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price?

Choices
A $6000
B $6048
C $6100
D $6150
E $6200

[spoiler]OA: A. Could you explain with steps please.[/spoiler]
Let x be the purchase price.
Then price after 1 year = x + 10% of x = 1.1x
Price after 2nd year = 1.05 * 1.1x
Price after early redemption penalty = 1.05 * 1.1x - 500
1.05 * 1.1x - 500 = 6430
x = [spoiler]$6,000[/spoiler]

The correct answer is A.
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by GMATGuruNY » Mon Mar 12, 2012 7:13 pm
rahulvsd wrote:A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price?

Choices
A $6000
B $6048
C $6100
D $6150
E $6200

[spoiler]OA: A. Could you explain with steps please.[/spoiler]
Only one answer choice is viable. I posted why here:

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