Precision Engineering invested $125,000 at 6 percent interest,compounded annually for 3 years.How much interest on interest did the company earn over this period of time?

Question

Quizplus · Accepted Answer

Using the formula for compound interest: 
A = P(1 + r/n)^(nt) 
where A is the total amount, P is the principal, r is the interest rate, n is the number of times compounded per year, and t is the time in years.

In this case, P = $125,000, r = 6%, n = 1 (compounded annually), and t = 3 years. Substituting these values into the formula:

A = $125,000(1 + 0.06/1)^(1*3) = $146,853.12

The interest earned over this period is:

I = A - P = $146,853.12 - $125,000 = $21,853.12

To find the interest on interest, we subtract the original interest earned in the first year from the total interest earned over the 3 years:

Interest on interest = $21,853.12 - ($125,000*0.06) = $21,853.12 - $7,500 = $14,353.12

Rounding to the nearest dollar gives us $14,353.

Therefore, the best answer is B.

Precision Engineering Invested $125,000 at 6 Percent Interest,compounded Annually for 3