Let's say Faizal intends to buy the Wira in five years' time. At what rate must his RM20,000 be compounded annually for it to grow to RM57,650 in five years?
To determine the rate at which Faizal's RM20,000 must be compounded annually, we can use the compound interest formula:
A = P(1 + r/n)^(nt)
Where:
A = final amount (RM57,650)
P = principal amount (RM20,000)
r = annual interest rate (unknown)
n = number of times interest is compounded per year (1, since it is compounded annually)
t = number of years (5)
Substituting the given values into the formula:
RM57,650 = RM20,000(1 + r/1)^(1*5)
Simplifying:
2.8825 = (1 + r)^5
We can now solve for (1 + r):
(1 + r) = 2.8825^(1/5)
Taking the fifth root of 2.8825:
(1 + r) = 1.25
Now to isolate r:
r = 1.25 - 1
Therefore, Faizal's RM20,000 must be compounded annually at a rate of 0.25 (or 25%) to grow to RM57,650 in five years.