Lorraine invests €20,000 now for seven years at 5% per annum compounded. What amount will her investment have grown to after seven years?

Lorraine invests €20,000 now for seven years at 5% per annum compounded. What amount will her investment have grown to after seven years?

• A. €27,000
• B. €28,140
• C. €27,600
• D. €33,180

Answer: (B)

Compound growth means you earn interest on both the original amount and on the interest already accrued. The future value after seven years is the present value times (1 + the annual rate) raised to the number of years. So you compute 20,000 × (1.05)^7. Since (1.05)^7 ≈ 1.4071, the amount is about 20,000 × 1.4071 ≈ €28,142, which rounds to €28,140. This is the figure that matches seven years of 5% compound growth. For context, with simple interest you’d only earn 7,000 in interest (20,000 × 0.05 × 7), giving 27,000 total, which explains why that option is not correct here. The other numbers don’t align with seven years of 5% annual compounding.

Compound growth means you earn interest on both the original amount and on the interest already accrued. The future value after seven years is the present value times (1 + the annual rate) raised to the number of years. So you compute 20,000 × (1.05)^7. Since (1.05)^7 ≈ 1.4071, the amount is about 20,000 × 1.4071 ≈ €28,142, which rounds to €28,140. This is the figure that matches seven years of 5% compound growth.

For context, with simple interest you’d only earn 7,000 in interest (20,000 × 0.05 × 7), giving 27,000 total, which explains why that option is not correct here. The other numbers don’t align with seven years of 5% annual compounding.