Continuous vs Annual Compounding

1
advanced-math

An investment of $8,000 earns continuous compound interest at 5% annual rate. What is the value after 10 years?

Use: A=PertA = Pe^{rt} where e2.718e \approx 2.718

A

$13,181.23

B

$12,000.00

C

$14,000.00

D

$13,030.16

Correct Answer: A

Choice A is the correct answer. Apply the continuous compound interest formula.

  1. Formula: A=PertA = Pe^{rt} where P=8000P = 8000, r=0.05r = 0.05, t=10t = 10.
  2. Calculate exponent: rt=0.05×10=0.5rt = 0.05 \times 10 = 0.5.
  3. Compute: A=8000e0.5=8000(1.6487)13,181.23A = 8000e^{0.5} = 8000(1.6487) \approx 13,181.23.
  4. Result: After 10 years, the investment is worth $13,181.23.

💡 Strategic Tip: Continuous compounding uses base ee, which grows faster than annual compounding.

Choice B is incorrect because this assumes simple interest (8000 + 4000). Choice C is incorrect because this calculation is wrong. Choice D is incorrect because this uses annual compounding, not continuous.