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compound interest

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compound interest

by LulaBrazilia » Sun Feb 16, 2014 9:53 am
If money is invested at r percent interest, compounded annually, the amount of the investment will double in approximately 70/r years. If Pat's parents invested $5,000 in a long-term bond that pays 8 percent interest, compounded annually, what will be the approximate total amount of the investment 18 years later, when Pat is ready for college?

A) $20,000
B) $15,000
C) $12,000
D) $10,000
E) $9,000
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by Patrick_GMATFix » Sun Feb 16, 2014 10:12 am
Leverage the shortcut provided. The investment doubles every 70/r years. In this case, r=8, so the investment will double in a little under 9 years. In 18yrs, the investment will come close to doubling twice. 5000 -> 10,000 -> 20,000. The full solution below is taken from the GMATFix App.

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by [email protected] » Sun Feb 16, 2014 8:49 pm
Hi LulaBrazilia,

This question has some similarities to "symbolism" questions (in which the prompt shows you a "made up" symbol, tells you what it means and asks you to do a simple calculation with it). The easiest way to tackle the question is to simply follow the instructions.

We're told that r = percent interest.

We're also told that an investment with DOUBLE in approximately 70/r years.

We're told to invest $5,000 at 8 percent for 18 years.

Plug in r = 8

70/8 is about 9 years, meaning our investment will DOUBLE in 9 years.

In the first 9 years, $5,000 doubles to $10,0000
In the next 9 years, $10,000 doubles to $20,000

Final Answer: A

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