- 4 Marks
Question
Trimpo Ltd can invest funds in Ghana’s financial market at 15% per annum. Presently, the Treasury Manager of the company is considering investing GH¢100,000.
Required:
Determine the length of time it will take to double the investment (round your answer to the nearest year). (4 marks)
Answer
Using the compound interest formula:
Where:
- (Future Value, since the investment doubles)
- (Initial Investment)
- (Annual interest rate)
- is the number of years to double the investment.
From the future value interest factor table for a single amount, it can be seen that
it takes about five years for a 15% annual interest rate to compound to a FVIF of 2
Rounded to the nearest year: It will take approximately 5 years to double the investment.
Alternative Approach – Rule of 72:
Using the Rule of 72, which is a simplified formula to estimate the number of years required to double an investment at a fixed annual rate of interest:
Rounded to the nearest year:
It will take approximately 5 years to double the investment.
(Marks allocation: Computation using compound interest formula = 2 marks; Final answer = 2 marks)
- Tags: Compound Interest, Doubling investment, Investment period, Rule of 72
- Level: Level 2
- Topic: Simple interest and compound interest
- Series: MAR 2023
- Uploader: Theophilus