In 1 year, Megan wants to buy a bicycle that costs 800.00. If she opens a savings account that earns 12% interest compounded continuously, how much will she have to deposit as principal to have enough money in 1 year to buy the bike?

Solution

I n 1 ye a r, M e g an w an t s t o b u y a bi cyc l e t ha t cos t s 800.00. 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 12% in t eres t co m p o u n d e d co n t in u o u s l 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 1 ye a r t o b u y t h e bik e ?

Principal : 709.54

Solution steps

Translate the problem into an equation:

800 = P e^{0.12 \cdot 1}

Solve for

P, 800 = P e^{0.12 \cdot 1} : P = 709.54

Principal : 709.54