Natalie received a gift of $1 000 from her grandmother. She decides to invest the money into a trip she wants to take when she graduates from college three years from now. What annual rate of return does she have to have to accumulate $1 250 by the time of her graduation?

Question

Quizplus · Accepted Answer

To find the annual rate of return, we use the formula for compound interest: $ A = P(1 + r)^n $. Here, $ A = 1250 $, $ P = 1000 $, and $ n = 3 $. Solving for $ r $, we get $ 1250 = 1000(1 + r)^3 $. Dividing both sides by 1000 gives $ 1.25 = (1 + r)^3 $. Taking the cube root of both sides, we find $ 1 + r = 1.077 $, so $ r = 0.077 $ or 7.7%.

Natalie Received a Gift of $1 000 from Her Grandmother