Accountancy Resources

When you invest a lump sum in savings, the interest on the lump sum is compounded. For example, if you invested $100 at 4 percent interest, after one year you would earn interest on $100 and the second year you would earn interest on $104. The formula to calculate compound interest for a lump sum

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When you invest a lump sum in savings, the interest on the lump sum is compounded. For example, if you invested $100 at 4 percent interest, after one year you would earn interest on $100 and the second year you would earn interest on $104. The formula to calculate compound interest for a lump sum is A = P (1+r/n)^nt where A is future value, P is present value or principal amount, r is the interest rate, t is the number of years the money is deposited for and n is the number of periods the interest is compounded each year.

Gather your information. In order to calculate how much your savings will be worth, you need to know what the interest rate is and how many times a year the interest will be paid. You can obtain that information from your financial institution. For example, you might be thinking of investing $1,000 at a 5 percent interest rate, compounded quarterly for five years.

Insert the relevant information into the compound interest calculation. In this example, the compound interest calculation would be: A = (1000 (1 + .05/4))^ 4(5).

Type the equation into the calculator and then press enter. In this example, A = (1000 (1 + .05/4))^ 4(5) = $1,282.04.

- Check with your calculator’s manual to ensure you are entering the equation correctly. some calculators use a * symbol for multiplication while others may require you to press an “x” key.

- Calculator

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