3/22/2020 IEB Wireframe

SECTION 2.9 Other Applications of Compound Interest Theory

We know that the more money you invest at some given interest rate, i, the more dollars of interest you will earn.
Further, once you earn a dollar's worth of interest, it becomes a part of the invested money and earns interest
itself. The latter characteristic is referred to as multiplicative or geometric growth and is what differentiates
compound interest from simple interest.

In any problem where there is geometric growth, even in nonfinancial situations, we can use the theory of
compound interest.

EXAMPLE 1A tree, measured in 2007, contains an estimated 150 cubic metres of wood. If the tree grows at a
rate of 3% per annum, how much wood would it contain in 2017?

SolutionThis is just geometric growth, so we can use compound interest theory. We have P = 150, i = 0.03, and n
= 10. Thus, in 2017,

EXAMPLE 2The population of Canada in July 2001 was 31.0 million people. In July 2011 it was 34.5 million
people.

1. What was the annual growth rate from July 2001 to July 2011?

2. At this rate of growth, when will the population reach 40 million people?

Solution aWe have P = 31.0, S = 34.5, n = 10, and we wish to determine i = j1. Hence,

Solution bWe have i = 0.01075 from a), P = 34.5, S = 40, and we wish to determine n. Therefore,

Therefore our population will reach 40 million sometime in May 2025 assuming the same rate of growth.

https://textflow.mheducation.com/parser.php?secload=2.9&fake&print 1/3
3/22/2020 IEB Wireframe

Page 74

EXAMPLE 3In 1980, Nolan Ryan, a pitcher for the Houston Astros, became the first million-dollar-a-year
major league baseball player. In 2001, Alex Rodriguez signed a contract with the Texas Rangers that paid him an
average of $25.2 million per season.

1. What is the annual rate of salary inflation from 1980 to 2001?

2. In 2008, Rodriguez had his contract renegotiated so that he earned an average of $28.0 million a year with
the New York Yankees. What was the annual rate of growth in his salary from 2001 to 2008?

3. If this growth continues, what would be his expected salary in 2014?

Solution aWe have P = 1 000 000, S = 25 200 000, n = 2001 − 1980 = 21 years.

Thus,

Solution bWe have P = 25.2, S = 28.0, n = 7

Thus,

Solution cIn the 2014 season, Rodriguez should expect to re-sign for:

EXERCISE 2.9
Part A

1. A city increased in population 4% a year during the period 2003 to 2013. If the population was 40 000 in
2003, what is the estimated population in 2023, assuming the rate of growth remains the same?

Answers

2. The population of Happy Town on December 31, 2007, was 15 000. The town is growing at a rate of 2%
per annum. What would be the increase in population in the calendar year 2015?

3. At what annual growth rate will the population of a city double in 11 years?

https://textflow.mheducation.com/parser.php?secload=2.9&fake&print 2/3
3/22/2020 IEB Wireframe

Answers

4. A university graduate starts his new job on his 22nd birthday at an annual salary of $48 000. If his salary
goes up 5% a year (on his birthday), how much will he be making when he retires one day before his 65th
birthday?

5. A potentially dangerous oil spill has occurred. It initially covered 0.25 square kilometres, but it is
spreading at a rate of 10% per hour. If nothing is done to stop it, how long will it take before it covers an
area of 10 square kilometres?

Answers

Page 75
Part B

1. 1. The number of fruit-flies in a certain lab increases at the compound rate of 4% every 40 minutes. If
there are 100 000 flies at 1 p.m. today, what will be the increase in the number of flies between 7
a.m. and 11 a.m. tomorrow?

2. At what time will there be 200 000 flies in the lab?

Answers

2. The population of a county was 200 000 in 1994 and 250 000 in 2004. Estimate the change in population
of the county between 2014 and 2019.

https://textflow.mheducation.com/parser.php?secload=2.9&fake&print 3/3