In 2 years, Melissa wants to buy a bicycle that costs 400.00. If she opens a savings account that earns 3% interest compounded annually, how much will she have to deposit as principal to have enough money in 2 years to buy the bike?

Solution

I n 2 ye a rs, M e l i ss a w an t s t o b u y a bi cyc l e t ha t cos t s 400.00. I f s h e o p e n s a s a v in g s a cco u n t t ha t e a r n s 3% in t eres t co m p o u n d e d ann u a ll y, h o w m u c h w i ll s h e ha v e t o d e p os i t a s p r in c i p a l t o ha v e e n o ug h m o n ey in 2 ye a rs t o b u y t h e bik e ?

Principal : 377.04

Solution steps

Translate the problem into an equation:

400 = P (1 + \frac{0.03}{1})^{1 \cdot 2}

Solve for

P, 400 = P (1 + \frac{0.03}{1})^{1 \cdot 2} : P = 377.04

Principal : 377.04