Question

If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is _____.
11.50%

Answer 1

Answer:

11.50 %

Explanation:

In estimating the effective annual rate of investment, we use the Future value formula and make i the subject of formula

Thus

FV = PV × (1 + i)^n

FV/PV = (1 + i)^n

FV/PV^ (1/n) = (1 + i)

i = FV/PV^(1/n) - 1

Given that

PV = 5500

FV = 8500

n = 4 years

Thus

i = 8500/5500^(1/4) - 1

= 3000^(1/4) - 1

= 0.1149

= 11.49%

= 11.50 % approximately.