Let's say Faizal intends to buy the Wira in five years' time. At what rate must his RM20,000 be compounded annually for it to grow to RM57,650 in five years?

Answer 1

To determine the rate at which Faizal's RM20,000 must be compounded annually, we can use the compound interest formula:

A = P(1 + r/n)^(nt)

Where:
A = final amount (RM57,650)
P = principal amount (RM20,000)
r = annual interest rate (unknown)
n = number of times interest is compounded per year (1, since it is compounded annually)
t = number of years (5)

Substituting the given values into the formula:

RM57,650 = RM20,000(1 + r/1)^(1*5)

Simplifying:

2.8825 = (1 + r)^5

We can now solve for (1 + r):

(1 + r) = 2.8825^(1/5)

Taking the fifth root of 2.8825:

(1 + r) = 1.25

Now to isolate r:

r = 1.25 - 1

Therefore, Faizal's RM20,000 must be compounded annually at a rate of 0.25 (or 25%) to grow to RM57,650 in five years.