A sum of money invested at compound interest grows to $5000 in 4 years at a rate

A sum of money invested at compound interest grows to $5000 in 4 years at a rate of 6% per annum. What was the principal?

A sum of money invested at compound interest grows to $5000 in 4 years at a rate of 6% per annum. What was the principal?

Correct Answer: $3960.00

Step 1: Identify the final amount (A), which is $5000.
Step 2: Identify the interest rate (r), which is 6% per annum, or 0.06 in decimal form.
Step 3: Identify the number of years (n), which is 4 years.
Step 4: Write the formula for compound interest: A = P(1 + r)^n.
Step 5: Substitute the known values into the formula: 5000 = P(1 + 0.06)^4.
Step 6: Calculate (1 + 0.06)^4, which equals approximately 1.262476.
Step 7: Rewrite the equation: 5000 = P * 1.262476.
Step 8: Solve for P by dividing both sides by 1.262476: P = 5000 / 1.262476.
Step 9: Calculate the value of P, which is approximately $3960.00.

Compound Interest – Understanding how compound interest works and how to apply the formula A = P(1 + r)^n to find the principal amount.
Exponential Growth – Recognizing that the investment grows exponentially over time due to the compounding effect.
Financial Calculations – Performing calculations involving percentages and understanding the relationship between principal, interest rate, and time.