A formula exists for a monetary return on an investment of continuously compounded interest. If the interest is compounded only
once a year, use the following formula. Suppose you have $100 to invest, but started investing only $50. What changes might increase your return on investment, if you plan to invest for 5 years?A = P(1 + r)n where A is the total amount, P is the principal invested, r is the annual interest rate, and n is the number of years
Your formula is missing the exponent sign "^", it should read: P(1+r)^n. Re: what changes would increase your return? - the compounding period (continuous compounding is higher than annual compounding), the higher "r" is the higher the return. The higher P is the higher the return - the beauty of compounding interest...interest paid on interest earned (already paid). Example: Formula for annually compounded interest at 4%: $50(1.04)^5 = $60.83 vs. if you invested all of the $100 now... $100(1.04)^5 = $121.67 you have invested only $50 more, but you receive... interest on the $50 = (60.83 - 50) = 10.83 interest on the $100 = (121.67 - 100) = 21.67 if you wait to invest the additional $50 you will lose the opportunity to receive interest on it, and interest on the interest paid each year during the 5 year period.
Above example with continuous compounding: Formula: P(e)^(r*t) where r= rate (here I use 4%) and t = time...."e" is a constant for continuous compounding, roughly equivalent to: 2.71828 $50(e)^(0.04*5) = $50(1.2214) = 61.07 $100(e)^(0.04*5) = $100(1.2214) = $122.14 you can see that with continuous compounding (vs. annual compounding) you earn more interest because interest is compounded more frequently (and that interest earns interest)...
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