Question

5. Company A sold old machinery for 200.000 Lira and decided to put this amount in a term deposit, which pays 12% annually. A) Calculate the amount of money that Company A will receive after 2 years of deposit compounded annually. (3p) B) Recalculate the result for part A if the bank offers 12% annual rate but compounded quarterly (that is, interest is calculated for every 3 months based on 12% annual rate) (3p)

Answer 1

Compound interest formula is FV = P(1+r/n)^yn

^{Where P = Starting principal, r = annual interest rate, y is the number of years invested and n is the number of compounding periods per year.}

^{FV is the future value, meaning the amount the principal grows to after n years}

^{A) Here P = 200000 Lira, r = 0.12 , y=2 and n=1}

^{So FV = 200000 Lira * (1 + 0.12)2 = 250880 Lira}

^{B) Here P = 200000 Lira, r = 0.12, y = 2 and n= 4}

^{So FV = 200000 Lira * (1 + 0.12)8 = 253354 Llira}