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Interest continuously compounding with a variable prinicple

  1. Sep 9, 2011 #1
    1. The problem statement, all variables and given/known data
    This is a question I *might* have already got the answer to, I'd just like for someone very good with calculus and algebra to verify/answer the question themselves.

    To be more exact with the problem, we are putting 1 dollar (a variable principle) into a continuously compounded interest account at rate r. At what moment does one year's interest (e^r-1), equal our principle of 1 dollar per year. Or at what time can we stop putting the dollar in completely.

    I solved it as the most complicated substitution problem I, personally, have ever done. Feel free to do it any way you please, but I'm looking for both answers and/or possible mistakes in my math.

    2. Relevant equations
    F=Pe^rt

    3. The attempt at a solution

    Let F = Final, P = principle, r = interest rate, y = years.
    Given that:
    F = Pe^(ry)

    And

    P1 = ($)1 x y
    (P1 because I'm going to have to use another P later)

    Then replacing 1y for P we get

    F = ye^(ry)

    This gives us F for any time y, and rate r.

    But we want a specific F, to get that I first defined what P2 is required for the next year's interest to be equal to the 1 dollar we are putting in every year.

    P2(e^r-1) = 1

    P2=1/(e^r-1)

    In order to substitute this into our original equation we must substitute P2 into a separate F = Pe^(rt2)

    We know that t2 = 1 because in the question we asked when does (e^r-1) of the *last* year equal $1.

    We get

    F = e^r/(e^r-1)

    Then substitute this final into our F = ye^ry

    we get

    e^r/(e^r-1) = ye^ry

    0 = ye^ry - e^r/(e^r-1)

    at 15% interest I get y = 3.96 years. Graphing on my calculator because as far as I know that is unsolvable algebraically

    at 8% interest I get y = 7.27 years.

    Sounds too good to be true. Put $20k in a savings account for 4-7 years and you will raise your wage $20k/year for the rest of your life? Start investing! It will be free soon. lol.

    This is only my most recent approach to this problem. Other answers which I have debunked are (for 8% interest) 13.8 years, 20 years, and 7.5 years. I'd like confirmation, or a correct answer please.
     
  2. jcsd
  3. Sep 12, 2011 #2

    vela

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    I think you haven't gotten any responses because it's not at all clear exactly what the set-up of the problem is.
     
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