ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal
Dene Co invests $20,000 today in a deposit paying 6% compound interest per year, with interest added at the end of each year. What will the balance be after 2 years?
The balance after two years is $22,472. With compound interest, multiply $20,000 by 1.06 squared (1.1236). Simple interest would give only $22,400 because it ignores interest earned on the first year's interest.
- A$22,472Correct
- B$22,400
- C$22,000
- D$21,200
Explanation
Balance = 20,000 x 1.06^2 = 20,000 x 1.1236 = $22,472. $22,400 uses simple interest for two years. $21,200 is the balance after only one year.
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