Tong Ah Khau deposited RM10, 000 today into an account that pays 8 percent interest for five years.

Question

Tong Ah Khau deposited RM10, 000 today into an account that pays 8 percent interest for five years. You would like to have same amount of money at the end of the next five years as him, but you can only earn six-percent interest on the amount of money you have invested. How much more money than Tong Ah Khau must you deposit today, if you want to have the same amount at the end of five years?

Answer 1

Assuming simple interest, the formula for interest earned is:

 

Interest = Principle*Rate*Time

 

For TAK, that's:

 

Interest = (RM10,000)*(0.08)*(5 years) = RM4000

 

You want the same interest after 5 years at 6% (=0.06)

 

RM4000 = Principle*(0.06)*(5 years)

 

4000/(0.06*5) = Principle = RM13,333.33