TAILIEUCHUNG - Accounting Workbook Cheat Sheet_10

Tham khảo tài liệu 'accounting workbook cheat sheet_10', tài chính - ngân hàng, kế toán - kiểm toán phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | More free books @ Chapter 12 Figuring Out Interest and Return on Investment 267 Be careful compounding in these longer-term contexts which run 5 10 20 or more years takes on a different emphasis. Compounding in these long range settings refers to the exponential growth idea that if something grows at a certain rate from year to year over enough years its size will end up being two or more times larger than what you started with. For instance if you start with a population of say 10 000 persons in a town and its population grows 6 percent per year its population will double to 20 000 in 12 years. You just invested your 10 000 year-end bonus in a 401 k plan a qualified tax-deferred retirement account . You don t pay income tax on the 10 000 or on the earnings in your retirement account until you withdraw money from the account sometime in the future. You plan to retire in 20 years. Being conservative you put the money in a savings account that pays 5 percent annual effective interest. The interest rate could change in the future but assume that the interest rate remains the same over all 20 years. Q. Assuming that your retirement account earns 5 percent annual interest for 20 years what will be the balance in your account when you retire in 20 years A. In order to answer the question for the 20year lifespan of the investment you need to understand how year-to-year compounding works. Compounding means that you don t withdraw your interest earnings each year. Instead you reinvest the annual earnings. The result of compounding for say the first four years is shown as follows Interest Retirement Account Earnings at Retirement Account Year at Start of Year at End of Year 1 10 10 2 10 11 3 11 11 4 11 12 The total amount of your earnings over the first four years is 2 . Someone may think that at 5 percent you earn each year on your 10 investment and

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