Question

Problem 4-22 Interest-on-Interest (LG4-3) Consider a $4,800 deposit earning 10 percent interest per year for ten years. What is the future value? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Future value How much total interest is earned on the original deposit? (Do not round Intermediate calculations. Round your answer to 2 decimal places.) Total interest earned How much is interest earned on interest? (Do not round Intermediate calculations. Round your answer to 2 decimal places.) Interest earned on the interest

Answer 1

Answer to Part 1.:

Present Value = $4,800
Rate (r ) = 10%
Time (n) = 10 years

Future Value = Present Value * (1 + r)^ n
Future Value = $4,800 * (1 + 0.10)^ 10
Future Value = $4,800 * 1.10^10
Future Value = $4,800 * 2.59374
Future Value = $12,449.95

Answer to Part 2.:

Total Interest Earned = $4,800 * 10% * 10
Total Interest Earned = $4,800.00

Answer to Part 3.:

Interest earned on the interest = Future Value – Present Value – Interest earned
Interest earned on the interest = $12,449.95 - $4,800.00 - $4,800.00
Interest earned on the interest = $2,849.95