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Compound Interest calculation

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Compound Interest calculation

by siddheart22 » Fri Jan 13, 2012 8:01 am
John deposits $5000 in a savings account for 5 years. The interest rate is 2.33% compounded annually for 5 years.

How much does John make in interest?

The solution will lead to an equation, Interest (I) = Principal (P) [1 + R/100]^N
where R - rate, and N - number of years.

I = 5000[1 + 2.33/100]^5
i.e.
I = 5000[102.33/100]^5

What is the easiest way to solve this equation?
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by Brent@GMATPrepNow » Fri Jan 13, 2012 8:26 am
siddheart22 wrote:John deposits $5000 in a savings account for 5 years. The interest rate is 2.33% compounded annually for 5 years.

How much does John make in interest?

The solution will lead to an equation, Interest (I) = Principal (P) [1 + R/100]^N
where R - rate, and N - number of years.

I = 5000[1 + 2.33/100]^5
i.e.
I = 5000[102.33/100]^5

What is the easiest way to solve this equation?
The expression 5000[102.33/100]^5 represents the total value of John's investment after 5 years.

So, if we want to find the amount that John made in interest, we need to subtract is initial $5000 investment from that total amount.

So, the total interest = 5000[102.33/100]^5 - 5000 or we might write: 5000[1.0233]^5 - 5000

On the GMAT, you'd never be asked to evaluate an expression of this magnitude. The answer choices would look something like 5000[1.0233]^5 - 5000

Cheers,
Brent
Brent Hanneson - Creator of GMATPrepNow.com
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