Question

Today, you invest $5,000 in an investment that pays 3% per year. How much will your investment be worth in 5 years?

Answer 1

Solution :

The formula for calculating the future value of an Investment with compound Interest is

FV = P * [ ( 1 + ( r / n ) ) ^{( n * t)}]

Where

FV = Future value of Investment   ; P =Initial Investment ;   r = rate of interest   ;

n = No. of compounding periods per year ; t = Time in years

As per the information given in the question we have

P = $ 5,000 ; r = 3 % = 0.03 ; n = 1 ( Since compounding is annual ) ; t = 5 Years ; FV = $ To find    ;

Applying the above values in the formula we have

= $ 5,000 * ( 1 + ( 0.03 / 1 ) ) ^{1 * 5}

= $ 5,000 * ( 1 + 0.03 ) ⁵

= $ 5,000 * ( 1.03 ) ⁵

= $ 5,000 * 1.159274

= $ 5,796.370372

= $ 5,796.37 ( when rounded off to two decimal places )

= $ 5,796 ( when rounded off to the nearest dollar )

Thus the worth of $ 5,000 after five years, if invested now at an interest rate of 3 % is = $ 5,796

Note : ( 1.03 ) ⁵ = 1.159274 is calculated using the excel function =POWER(Number,Power)

=POWER(1.03,5)