If John invested $ 1 at 5 percent interest compounded

Expert replies

VJesus12: Legendary Member; Posts: 2276; Joined: Sat Oct 14, 2017 6:10 amFollowed by: 3 members

by VJesus12 » Tue Mar 27, 2018 2:41 am

If John invested $ 1 at 5 percent interest compounded annually, the total value of the investment, in dollars, at the end of 4 years would be

A. (1.5)^4
B. 4(1.5)
C. (1.05)^4
D. 1 + (0.05)^4
E. 1 + 4(0.05)

The OA is the option C.

Is not A the correct option? I'm confused. Help!!!!

Like this post

Source: Beat The GMAT — Problem Solving | Tue Mar 27, 2018 2:41 am

Vincen: Legendary Member; Posts: 2898; Joined: Thu Sep 07, 2017 2:49 pmFollowed by: 5 members; Thanked: 6 times

by Vincen » Tue Mar 27, 2018 5:52 am

VJesus12 wrote:If John invested $ 1 at 5 percent interest compounded annually, the total value of the investment, in dollars, at the end of 4 years would be

A. (1.5)^4
B. 4(1.5)
C. (1.05)^4
D. 1 + (0.05)^4
E. 1 + 4(0.05)

The OA is the option C.

Is not A the correct option? I'm confused. Help!!!!

Hi Vjesus12.

The formula to calculate the interest compound is: $$\left(\text{Principal}\ \text{Amount}\right)\cdot\left(1+R\right)^T$$ where R is the interest rate (expressed as 0.r) and T the time.

Therefore, in this case R=5% (r=0.05) and T=4. Hence, $$Investment=\left(1\right)\cdot\left(1+0.05\right)^4=\left(1.05\right)^4.$$ The correct answer is the option C .

PD: The option A would be correct if the interest rate was 50%.

Like this post

GMAT/MBA Expert

ErikaPrepScholar: Legendary Member; Posts: 503; Joined: Thu Jul 20, 2017 9:03 amFollowed by: 15 members; Thanked: 86 times; GMAT Score:770

by ErikaPrepScholar » Wed Mar 28, 2018 6:40 am

Be super careful whenever you have a percent less than 10 - there will always be a zero after the decimal. (e.g. 5% = 0.05, 2.2% = 0.022, etc.)

One way you can think about converting a percent into a decimal is dividing by 100. So 50% = 50/100 = 0.5, while 5% = 5/100 = 0.05.

It can also help to think logically about the size of the numbers. 5% is a pretty small percent, so we want a decimal that is also pretty small. 0.5 is half of 1 (pretty large), so it isn't a logical match - we want a much smaller decimal.

Erika John - Content Manager/Lead Instructor
https://gmat.prepscholar.com/gmat/s/

Get tutoring from me or another PrepScholar GMAT expert: https://gmat.prepscholar.com/gmat/s/tutoring/

Learn about our exclusive savings for BTG members (up to 25% off) and our 5 day free trial

Check out our PrepScholar GMAT YouTube channel, and read our expert guides on the PrepScholar GMAT blog

Like this post

swerve: Legendary Member; Posts: 2535; Joined: Sun Oct 29, 2017 2:04 pmFollowed by: 6 members

by swerve » Wed Mar 28, 2018 8:54 am

Hi Vjesus12,

simple interest = (principal)(1 + RT)
compound interest = (principal)(1 + RT)^T

Where R is the yearly interest rate and T is the number of years.

In this prompt, the answer choices show that we don't actually have to calculate anything, we just need to "format" the calculation correctly. Where told that the interest is COMPOUNDED ANNUALLY, so we need the compound interest formula, with a principal of $1, and R of 5% (we would "translate" as .05) and T of 4. We'd have Option C.

Regards!

Like this post

GMAT/MBA Expert

Scott@TargetTestPrep: GMAT Instructor; Posts: 8137; Joined: Sat Apr 25, 2015 10:56 amFollowed by: 29 members; Location: Los Angeles, CA; Thanked: 43 times

by Scott@TargetTestPrep » Wed Mar 28, 2018 10:15 am

VJesus12 wrote:If John invested $ 1 at 5 percent interest compounded annually, the total value of the investment, in dollars, at the end of 4 years would be

A. (1.5)^4
B. 4(1.5)
C. (1.05)^4
D. 1 + (0.05)^4
E. 1 + 4(0.05)

Using the compound interest formula we have:

1(1 + 0.05)^4

(1.05)^4

Answer: C

Scott Woodbury-Stewart
Founder and CEO
[email protected]

See why Target Test Prep is rated 5 out of 5 stars on BEAT the GMAT. Read our reviews

Like this post

Post new topic Post Reply

• Page 1 of 1

GMAT Course Reviews

559 reviews

1168 reviews

431 reviews

359 reviews

147 reviews

5/5

5 Star (560 Reviews)

"Target Test Prep is the closest to the official version of the GMAT exam, about 99% accuracy in terms of the quality and quantity of information. The course has excellently created singular sets of focused lessons and tests for every possible topic that one could come across in the official GMAT exam."

"The TTP course maximizes the efficiency of the time you spend studying. It will take time and effort but I could almost guarantee that if you complete the course exactly as it is laid out you will get an amazing score. They also have a very responsive team willing to help with any questions you might have."

"TTP has two things that I think no other test prep company offers: A teaching approach that reinforces understanding and an attitude that will give you the mental preparedness needed to succeed on the test. TTP gives you a deep understanding of the concept you need to know while teaching you how to think."

Write a Review