The interest rate r required to increase investment p to amount a in t years is found using the formula r=(a/p)^1-t - 1. Find the interest rate r when p =2500, a =3600, and t =2.
Accepted Solution
A:
The interest rate would be 20%.
The formula is derived from the compound interest formula
[tex]A=p(1+r)^t[/tex].
We want to isolate r in this equation to rewrite the formula.Β The first thing we would cancel, outside parentheses, would be p; divide both sides by p and we have
[tex]\frac{A}{p}=(1+r)^t[/tex]
We want to cancel the exponent, t, next.Β We can raise a power to its reciprocal to undo it; for example, raising a squared amount to the 1/2 power will undo the exponent.Β We will raise both sides of this to the 1/t power:
[tex](\frac{A}{p})^{\frac{1}{t}}=1+r[/tex]
Now we cancel the 1 by subtracting, giving us
[tex](\frac{A}{p})^{\frac{1}{t}}-1=r[/tex]
Using this formula, we plug in 3600 for A, 2500 for p and 2 for t: