Am I using the simple interest formula correctly?

Question

Sally has inherited a land that was purchased for $30,000 in 1960. The value of the land increased by approximately 5% per year. What is the approximate value of the land in the year 2017?

The answer is $484,000.

I tried using the simple interest formula $I = Prt$ to solve this problem. But I get $$I = 30,000*0.05*57 = $85500$$

What am I doing wrong?

this is equivalent to compound interest, because its 5 percent increase from the previous year every year — Vasili, Oct 03 '19 at 14:44

score 1 · Accepted Answer · answered Oct 03 '19 at 14:40

1

Should be compound interest, not simple interest.

$30000 \times (1.05)^{57} \approx 484073$

answered Oct 03 '19 at 14:40

gandalf61

15,326

score 0 · Answer 2 · answered Oct 03 '19 at 14:39

My guess is you are meant to use compound interest for this. Simple interest does not make much sense for explaining the increase in value of an investment over such a long period of time.

Compounding investment returns is such a common assumption that whoever posed the problem probably thought it was not necessary to mention it.

Am I using the simple interest formula correctly?

2 Answers2