Question

Mai invests $20,000 at age 20. She hopes the investment will be worth $500,000 when she turns 40. If the interest compounds continuously, approximately what rate of growth will she need to achieve her goal? Round to the nearest tenth of a percent.

Answer 1

Answer:

$\approx$ 17.5% per annum

Step-by-step explanation:

Given:

Money invested = $20,000 at the age of 20 years.

Money expected to be $500,000 at the age of 40.

Time = 40 - 20 = 20 years

Interest is compounded annually.

To find:

Rate of growth = ?

Solution:

First of all, let us have a look at the formula for compound interest.

$A = P \times (1+\frac{R}{100})^T$

Where A is the amount after T years compounding at a rate of R% per annum. P is the principal amount.

Here, We are given:

P = $20,000

A = $500,000

T = 20 years

R = ?

Putting all the values in the formula:

$500000 = 20000 \times (1+\frac{R}{100})^{20}\\\Rightarrow \dfrac{500000}{20000} =(1+\frac{R}{100})^{20}\\\Rightarrow 25 =(1+\frac{R}{100})^{20}\\\Rightarrow \sqrt[20]{25} =1+\frac{R}{100}\\\Rightarrow 1.175 = 1+0.01R\\\Rightarrow R \approx17.5\%$

So, the correct answer is $\approx$ 17.5% per annum and compounding annually.