FDP guide pg 109 #5

[margaretmyoder]

5. A 7% car loan, which is compounded annually, has an interest payment of $210 after the first year. What is the principal on the loan?

To solve this equation, I used the compound interest formula: P(1+(r/n))^(nt) to solve for P.

P(1+(r/n))^(nt) = Compound interest
P(1+(.07/1))^(1*1) = 210
P(1.07) = 210
P = 196.26

The solution on page 112 to this problem is $3,000. The book says: Use a percent table to solve this problem, which helps you find the decimal equivalent equation.

Part: 210------ 7
Whole: x-------100

21,000 = 7x
x = 3,000

Can you explain why a percent table would be used to solve this problem when the information given in the problem aligns with the compound interest equation?

[tommywallach]

There's no reason to use the compound interest formula when the interest isn't actually compounding. This is actually a simple interest problem (there's no compounding). So it's total overkill to use that formula. All you need is:

.07x = 210

x = 3000

-t