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# coumpoiund interest

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12,500 = 5000 ( 1 + r/1 ) 1(5)

Oct 22, 2017

#1
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The first step is that we can clear unnecessary numbers:

12,500 = 5000 ( 1 + r ) ( 5 )

Then we divide both sides by 12,500

1 = 2 ( 1 + r )

Now that we got rid of the big numbers, we can distribute the parentheses.

1 = 2 + 2r

Subtract 2 from both sides:

2r = -1

Divide 2 from both sides:

r = -1/2

Oct 22, 2017
#2
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supermanaccz:

No, this is a TVM formula(Time Value of Money) and he/she wants to find the compound interest rate.

However, they have written the formula wrong!

12,500 =500(1 + r)^5    divide both sides by 500

25 =(1+r)^5                      Take the 5th root of both sides

(1+r) =25^(1/5)

(1+r) =1.90365                Subtract 1 from sides

r =0.90365 x 100

r=90.365% which is the interest rate. However, it is so high, there is almost certainly something wrong with the way the formula is written. I suspect that it is something like this:

12,500 =500(1 + r/12)^(5*12)

12,500 =500(1 + r/12)^60, solve for r

r =66.14% - interest rate compounded monthly. Even this interest rate is way too high !!!.

Note to the questioner: Why don't you tell us what you are trying to calculate by stating the question as it is written in your book or assignment paper. Then will show you how to calculate the interest rate accurately.

Oct 22, 2017